Accurate identification of the correctly-priced stocks is crucial for investing success. However, in reality, correctly-priced stocks and overpriced toxic stocks are intermixed in such a way that it is difficult to distinguish the two.
Generally, overpriced toxic stocks are susceptible to external shocks. Moreover, these stocks are burdened with a large amount of debt. The price of these stocks is artificially inflated. Nonetheless, the higher price of toxic stocks is only temporary in nature as it is higher than its true intrinsic value.
Investors are likely to benefit from proper 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 figuring out toxic stocks and discarding or short selling those at the right time is the key to protect 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 12 toxic stocks that showed up on the screen:
Wilmington, DE-based Incyte Corporation INCY is a drug discovery company. Over the past 60 days, the Zacks Consensus Estimate for current-year earnings per share has declined from $1.08 to $1.07. The stock currently has a Zacks Rank #5 (Strong Sell).
Hanover, MD-based The KEYW Holding Corporation KEYW is engaged in cyber security and cyber superiority solutions to defense, intelligence and national security agencies. Over the past seven days, the Zacks Consensus Estimate for current-quarter loss per share has widened from 18 cents to 19 cents. The stock has a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Vancouver, Canada-based First Majestic Silver Corp. AG is engaged in the production, development, exploration, and acquisition of silver mines in Mexico. Over the past 30 days, the Zacks Consensus Estimate for current-quarter loss per share has widened from 17 cents to 21 cents. The stock currently has a Zacks Rank #3.
El Segundo, CA-based Mattel, Inc. MAT is the world’s largest manufacturer of toys. Over the past 30 days, the Zacks Consensus Estimate for current-quarter loss per share has widened from 8 cents to 11 cents. The stock currently has a Zacks Rank #3.
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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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