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Protect Your Portfolio Health From These 4 Toxic Stocks

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·5 min read
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Successful investing calls for the appropriate identification of overpriced stocks and correctly priced stocks. In practice, overhyped toxic stocks and fairly priced stocks are intermixed in the marketplace in such a way that it becomes difficult to distinguish between them. Investors who can correctly spot the overpriced stocks and shun them at the right time are the ones likely to make a profit.

Usually, toxic stocks are fraught with huge debt loads and are susceptible to external shocks. Also, the unjustifiably high price of the toxic stocks is short-lived as the intrinsic value of these stocks is less than their current price. Quite naturally, if you own such toxic stocks for a long period of time, you are sure to make a huge loss in your wealth.

Caesars Entertainment CZR, Blackbaud Inc. BLKB, Chegg Inc. CHGG and Sendas Distribuidora ASAI are a few such toxic stocks.

The higher price of the toxic stocks can be attributed to either an irrational exuberance associated with them or some serious fundamental lacuna. If you own such stocks for long, you are likely to see a big loss in your wealth.

Conversely, if you can accurately pinpoint the toxic stocks, you are likely to 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 picking up stocks with strong growth potential, pinpointing toxic stocks and abandoning them at the right time is the key to protecting your portfolio from big losses or making profits by short selling them.

Screening Criteria

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 -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 19 toxic stocks that showed up on the screen:

Blackbaud: Blackbaud is a cloud software company working for social causes. The company combines technology and expertise to help organizations achieve their missions.

The Zacks Consensus Estimate for Blackbaud’s 2022 EPS implies a year-over-year decline of 1.9%. The bottom-line projection has been revised downward by 22 cents over the past 60 days. BLKB currently carries a Zacks Rank #5 (Strong Sell) and a VGM Score of C.

Caesars Entertainment: Caesars Entertainment is a diversified gaming and hospitality company, with the primary source of revenues being gaming operations that include mobile, online gaming and sports betting.

The Zacks Consensus Estimate for Caesars Entertainment’s 2022 EPS has been revised downward by 32 cents over the past 30 days. The stock missed earnings estimates in two of the trailing four quarters and beat the same twice, with the average negative surprise being 295.8%. CZR currently carries a Zacks Rank #4 (Sell).

Chegg: This online education company offers Chegg Services, comprising digital products and services such as Chegg Study, Chegg Writing, and Chegg Tutors. These allow students to find human help on its learning platform through a network of live tutors.

The Zacks Consensus Estimate for Chegg’s 2022 EPS implies a year-over-year decline of 2.3%. The bottom-line projection has been revised downward by 2 cents over the past 30 days. CHEG currently carries a Zacks Rank #4 and a VGM Score of C.

Sendas Distribuidora: Sendas Distribuidora is engaged in the retail and wholesale of food as well as other products through its stores. ASAI currently carries a Zacks Rank #4.

The Zacks Consensus Estimate for Sendas Distribuidora’s 2022 bottom line implies a year-over-year decline of 31.3%. The consensus mark for 2022 earnings has been revised downward by a penny per share over the past 60 days

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.


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Blackbaud, Inc. (BLKB) : Free Stock Analysis Report
 
Caesars Entertainment, Inc. (CZR) : Free Stock Analysis Report
 
Chegg, Inc. (CHGG) : Free Stock Analysis Report
 
Sendas Distribuidora S.A. Sponsored ADR (ASAI) : Free Stock Analysis Report
 
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