Investing in a stock whose current price is not rationally justified by its true potential is sure to result in loss over time. Identifying such bloated stocks accurately and dumping them at the right time can protect your portfolio.
Overpricing of these toxic stocks can be attributed to either an irrational exuberance associated with them or some serious drawbacks. And if you own such stocks for an inordinate period of time, you are likely to see significant erosion of your wealth.
However, if you can correctly detect such toxic stocks, you may gain in a bear market by resorting to an investing strategy called short selling. This strategy allows one to sell a stock first and then buy it when the price falls. Naturally, short selling excels in bear markets, while it typically loses money in bull markets.
So, just like identifying promising stocks, detecting toxic stocks and dumping them at the right time is crucial to safeguarding one's portfolio from big losses or earning 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 over 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 13 toxic stocks that showed up on the screen:
New Fortress Energy NFE: Based in New York, New Fortress is an integrated energy infrastructure company. It currently carries a Zacks Rank #5 (Strong Sell). The Zacks Consensus Estimate for its loss for the current year has widened from 9 cents to 55 cents per share over the past 30 days. The company missed earnings estimates in each of the trailing four quarters, with the average negative surprise being 72.4%.
Cameco Corporation CCJ: Cameco is one of the world's largest uranium producers. This Zacks Rank #5 firm is a significant supplier of conversion services and one of the two CANDU fuel manufacturers in Canada. Over the past seven days, the Zacks Consensus Estimate for 2020 loss per share has widened by 6 cents. The consensus mark for 2020 and 2021 sales suggests a year-over-year decline of 6.9% and 14.3%, respectively.
Carrols Restaurant Group, Inc. TAST: This Zacks Rank #4 (Sell) company is the largest BURGER KING franchisee in the United States with more than 800 restaurants. The Zacks Consensus Estimate for 2020 has deteriorated from earnings of 8 cents to a loss of 5 cents over a period of 30 days. The consensus mark for 2021 earnings per share has also narrowed by 4 cents over the same time period.
Las Vegas Sands Corporation LVS: This Zacks Rank #4 company is a leading international developer of multi-use integrated resorts, primarily operating in the United States and Asia. The Zacks Consensus estimate for 2020 sales and earnings suggests a year-over-year decline of 72% and 162%, respectively. The consensus mark for 2021 earnings per share has moved south by 45 cents over the past 30 days.
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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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Las Vegas Sands Corp. (LVS) : Free Stock Analysis Report
Carrols Restaurant Group, Inc. (TAST) : Free Stock Analysis Report
Cameco Corporation (CCJ) : Free Stock Analysis Report
New Fortress Energy LLC (NFE) : Free Stock Analysis Report
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