One key factor behind successful investing is the correct identification of overpriced and fairly priced stocks. In practice, overvalued stocks and the correctly priced ones are mingled in such a way that distinguishing them is a tough task for investors. However, investors who can identify the overhyped toxic stocks and discard them at the right time are the ones who stand to benefit.
Usually, toxic companies are vulnerable to external onslaughts and burdened with huge debts. Irrationally high price of the toxic stocks is short lived as their current price exceeds their inherent value and these stocks are bound to result in loss for investors over time.
Higher price of the toxic stocks can be ascribed to either an irrational exuberance associated with them or some serious fundamental drawbacks. If you own such stocks for a long period of time, you are bound to see a significant loss in your wealth.
If you can, however, accurately figure out the toxic stocks, you may gain by resorting to an investing strategy called short selling. This strategy allows you to sell a stock first and then buy it when the price falls.
While short selling excels in bear markets, it typically loses money in bull markets.
So, just like identifying stocks with growth potential, pinpointing toxic stocks and dumping them at the right time is the key to safeguard your portfolio from big losses or make profits by short selling them.
Here is a winning strategy that will help you identify overpriced toxic stocks:
Most recent Debt/Equity Ratio greater than the median industry average: High debt/equity ratio implies increased 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 -5: Negative EPS estimate revision for this fiscal year and the next 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. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Here are four of the 34 toxic stocks that showed up on the screen:
Myriad Genetics, Inc. MYGN: The molecular diagnostics company, based in Utah, currently carries a Zacks Rank #3. Over the past 60 days, 2020 earnings estimates of this Zacks Rank #3 company has deteriorated to a loss of 13 cents per share from earnings of 37 cents.
Casella Waste Systems CWST: This Vermont-based provider of vertically integrated solid waste services currently carries a Zacks Rank #3. Over the past 90 days, its fiscal 2020 earnings estimates have declined 20 cents a share.
CNH Industrial CNHI: This London-based firm offers vehicles for agricultural and industrial purposes. Over the past 60 days, 2020 earnings estimates of this Zacks Rank #4 (Sell) company has deteriorated to a loss of 12 cents per share from earnings of 31 cents
Schlumberger Limited SLB: Houston, TX-based Schlumberger is a leading oilfield services company, carrying a Zacks Rank #3. Over the past 30 days, its fiscal 2020 earnings estimates have declined 2 cents a share.
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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
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Schlumberger Limited (SLB) : Free Stock Analysis Report
Myriad Genetics, Inc. (MYGN) : Free Stock Analysis Report
Casella Waste Systems, Inc. (CWST) : Free Stock Analysis Report
CNH Industrial N.V. (CNHI) : Free Stock Analysis Report
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