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Reduce Investment Risk by Dumping These Toxic Stocks Now

·5 min read

Missiles are raining down on Ukraine. Europe is back on the battlefield after 77 years as Russia unleashes the biggest attack on the continent since the World War II. Amid the war tensions, major U.S. indices proceeded to make new correction lows, only to rebound later. Dow, NASDAQ, and S&P 500 closed higher yesterday, reversing sharp corrections earlier during the session.

The Nasdaq declined 3.45% before finishing up 3.34%. The S&P was down 2.62% before closing up at 1.50%. And the Dow was down 2.59% before finishing up at 0.28%. Yesterday's spectacular turnaround notwithstanding, severe bouts of volatility are expected in the coming days amid geopolitical tensions and inflation concerns.

In times of such uncertainty, it’s as important to get rid of fundamentally weak toxic stocks as it is to invest in attractively valued companies possessing fundamental strength. An ill-informed investor can lose big if he stays invested in toxic stocks. So, to guard your portfolio from big losses, get rid of the toxic stocks before it’s too late.

Usually, toxic stocks are fraught with huge debt loads and are susceptible to external shocks. The price of toxic stocks is unreasonably high. The artificially high price of the toxic stocks is only temporary as the intrinsic value of the same is lower than the current bloated price.

The unrealistically high price of toxic stocks can be due to either an irrational exuberance associated with them or some fundamental drawbacks. Owning such stocks for a long period of time can be detrimental to investors and may result in huge erosion of wealth. Investors who can correctly distinguish between overblown/inflated toxic stocks and fairly priced stocks see success at the end.

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 #3 (Hold): We have not considered Buy and Hold-rated stocks that generally outperform or are in line with the market. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Here are four of the 24 toxic stocks that showed up on the screen:

Marcus Corporation MCS: Headquartered in Milwaukee, WI, it owns and operates movie theatres and hotels and resorts in the United States. MCS currently carries a Zacks Rank #4 (Sell) and has a VGM Score of C.

The Zacks Consensus Estimate for Marcus’ fiscal 2021 loss is $1.92 per share, which has widened by 13 cents over the past 30 days. The consensus mark for fiscal 2022 bottom line is pegged at a loss of 4 cents, which has deteriorated from earnings of 38 cents over the past 30 days.

TripAdvisor, Inc. TRIP: Based in Massachusetts, TripAdvisor is one of the largest online travel research companies in the world. TRIP currently carries a Zacks Rank #4 and has a VGM Score of D.

The Zacks Consensus Estimate for TripAdvisor’s earnings for the current year has moved south by 21 cents to $1.04 per share over the past 30 days. Over the trailing four quarters, TRIP missed earnings estimates on all occasions, with the average negative surprise being 46.7%.

AppLovin Corporation APP: California-based AppLovin provides a technology platform that enables developers to market, monetize, analyze and publish their apps. APP currently carries a Zacks Rank #4 and has a VGM Score of C.

The Zacks Consensus Estimate for AppLovin’s earnings for the current year has moved south by 44 cents to 22 cents per share over the past seven days. Over the trailing four quarters, APP missed earnings estimates on all occasions, with the average negative surprise being 136.8%.

Cano Health CANO: This U.S. healthcare provider for seniors and underserved communities went public in June 2021 by merging with Jaws Acquisition. CANO currently carries a Zacks Rank #4 and has a VGM Score of D.

The Zacks Consensus Estimate for Cano Health’s 2022 earnings implies a year-over-year decline of 68.7%. The consensus mark for earnings has moved south by 2 cents over the past 60 days. In the last reported quarter, CANO incurred a loss of 2 cents a share, wider than the consensus mark of a penny.

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 back testing 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.

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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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Marcus Corporation The (MCS) : Free Stock Analysis Report
 
TripAdvisor, Inc. (TRIP) : Free Stock Analysis Report
 
AppLovin Corporation (APP) : Free Stock Analysis Report
 
Cano Health, Inc. (CANO) : Free Stock Analysis Report
 
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