Precise identification of correctly-priced stocks is the key to successful investing. However, in reality, overpriced toxic stocks and rightly-priced stocks are intertwined in such a way that it is difficult to distinguish between the two.
Generally, overpriced toxic stocks are vulnerable to outside shocks. Moreover, these stocks are loaded with a large amount of debt. The price of these stocks is artificially inflated. The higher price of toxic stocks is only temporary in nature as it is higher than its intrinsic value.
Investors are likely to gain from accurate identification of toxic stocks with the help of an investing strategy called short selling. This strategy allows investors to sell a stock first and then buy it when price falls.
While short selling excels in bear markets, it typically loses money in bull markets.
So, correctly identifying toxic stocks and discarding or short selling those at the right time is the key to guard your portfolio from big losses.
Here is a winning strategy that will help you to identify overpriced toxic stocks:
Most recent Debt/Equity Ratio greater than the median industry average: High debt/equity ratio implies high leverage. High leverage indicates a huge level of repayment that the company has to make in connection with the debt amount.
P/E using 12-month forward EPS estimate greater than 50: A very high forward P/E implies that a stock is highly overvalued.
% Change in F (1) and F (2) Estimate (12 Weeks) less than 0: Negative EPS estimate revision for this and the next fiscal year during the past 12 weeks points to analysts’ pessimism.
Zacks Rank more than or equal to #3 (Hold): We have not considered Buy-rated stocks that generally outperform the market.
Here are four of the 21 toxic stocks that showed up on the screen:
Etsy, Inc. ETSY is a Brooklyn, NY-based Internet services company. It operates a marketplace to make, sell and buy goods online and offline worldwide. In the past seven days, the Zacks Consensus Estimate for current-year earnings per share has remained unchanged at 71 cents. The company has a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Leawood, KS-based AMC Entertainment Holdings, Inc. AMC operates as a theatrical exhibition company primarily in the United States. Over the past 30 days, the Zacks Consensus Estimate for current-year earnings has declined from 26 cents to 22 cents. The stock currently has a Zacks Rank #3.
Covanta Holding Corporation CVA is a Morristown, NJ-based alternative energy company that provides waste and energy services in the United States and Canada. In the past 30 days, the Zacks Consensus Estimate for current-year earnings per share has declined from 5 cents to 3 cents.
Frederick, MD-based U.S. Silica Holdings, Inc. SLCA is a producer of industrial minerals, including sand proppants, whole grain silica, ground silica, fine ground silica, calcined kaolin clay and aplite clay. Over the past 30 days, the Zacks Consensus Estimate for current-quarter loss per share has widened from 6 cents to 9 cents. The stock currently has a Zacks Rank #3.
Get the rest of the stocks on the list and start putting this and other ideas to the test. It can all be done with the Research Wizard stock picking and backtesting software.
The Research Wizard is a great place to begin. It's easy to use. Everything is in plain language. And it's very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.
Click here to sign up for a free trial to the Research Wizard today
Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.
Disclosure: Performance information for Zacks’ portfolios and strategies are available at: https://www.zacks.com/performance.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Etsy, Inc. (ETSY) : Free Stock Analysis Report
AMC Entertainment Holdings, Inc. (AMC) : Free Stock Analysis Report
U.S. Silica Holdings, Inc. (SLCA) : Free Stock Analysis Report
Covanta Holding Corporation (CVA) : Free Stock Analysis Report
To read this article on Zacks.com click here.
Zacks Investment Research