Accuracy in distinguishing overpriced stocks from the fairly priced ones leads to profitable investing. In a complicated market place, the overpriced stocks and the correctly priced ones are intermixed in such a way that differentiating between the two is a tough task. Figuring out bloated toxic stocks on a consistent basis and discarding them at the right time is the key to successful investing.
Usually, toxic companies are characterized by a high debt burden and are vulnerable to external shocks. The hype associated with the irrationally high-priced toxic stocks is usually short-lived as their intrinsic value falls short of their current price. Elevated price levels of these stocks can be due to either an irrational exuberance associated with them or some serious fundamental lacunae. If you own such overhyped stocks for a long period of time, you are bound to see huge loss of wealth.
However, if you can correctly pick such 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 picking stocks with huge growth potential, figuring out toxic stocks and abandoning them at the right time is the key to shield your portfolio from big losses.You can 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 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 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 the 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 stocks that made it through the screen:
Primo Water Corporation PRMW: Headquartered in North Carolina, Prime Water operates as a provider of three- and five-gallon purified bottled water and water dispensers sold through major retailers nationwide.Over the past90 days, its 2020 earningsestimates have declined from 51 cents to 36 cents.Currently, the company carries a Zacks Rank #3.
Alteryx, Inc. AYX: Based in California, Alteryx provides self-service data analytics software platform. Over the past 90 days, its 2020 earnings estimates have remained stable at 83 cents. Currently, the company carries a Zacks Rank #3.
Kimbell Royalty Partners, L.P. KRP: Texas-based Kimbell Royalty owns and acquires mineral and royalty interests in oil and natural gas properties. Over the past 30 days, its 2020 earnings estimates have decreased by 7 cents to 17 cents. Currently, the company carries a Zacks Rank #3.
Square Inc SQ: Headquartered in San Francisco, Square offers financial and marketing services through its comprehensive commerce ecosystem that helps sellers to start, run and grow their businesses.Over the past 30 days, its 2020 earnings estimates have decreased by 2 cents to 93 cents. Currently, the company carries 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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Square, Inc. (SQ) : Free Stock Analysis Report
Primo Water Corporation (PRMW) : Free Stock Analysis Report
KIMBELL ROYALTY (KRP) : Free Stock Analysis Report
Alteryx, Inc. (AYX) : Free Stock Analysis Report
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