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The secret of successful investing lies in the proper identification of overpriced stocks and reasonably priced stocks. In a complex marketplace, overblown stocks and the correctly priced ones are intertwined in such a way that it is not easy to distinguish between them. However, spotting the bloated toxic stocks on a regular basis and abandoning them at the right time is one of the secrets to a winning investment strategy.
Usually, toxic companies are characterized by a huge debt burden and are vulnerable to external shocks. Irrationally high price of the toxic stocks is short-lived as their current price is higher than their intrinsic value and these are bound to result in loss for investors over time.
Overpricing of the toxic stocks can be ascribed to either an irrational exuberance surrounding them or some serious fundamental drawbacks. If you own such bubble stocks for an inordinate period of time, you are bound to see massive erosion of wealth.
However, if you are a smart investor and can precisely spot 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 pinpointing stocks with growth potential, identifying toxic stocks and discarding them at the right time is crucial to shield your portfolio from big losses or make profits by short selling them.
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 18 toxic stocks that showed up on the screen:
Manchester United Ltd. MANU: Manchester United owns and operates a professional sports team. Over the past 30 days, the Zacks Consensus Estimate for 2021 has deteriorated from earnings of a penny to loss of 31 cents a share. The bottom-line projection indicates a year-over-year plunge of 210%. The company currently has a Zacks Rank #5 (Strong Sell).
Carrols Restaurant Group, Inc. TAST: This Zacks Rank #5 company is the largest BURGER KING franchisee in the United States, with more than 800 restaurants. The Zacks Consensus Estimate for Carrols’ 2021 earnings has been revised 66.6% downward over the past 60 days.
Astronics Corporation ATRO designs and manufactures products for aerospace, defense, and electronic industries. The Zacks Consensus Estimate for loss for the current year has widened from 12 cents a share to 57 cents over the past 90 days. The stock carries a Zacks Rank #4 (Sell) at present.
Ocugen Inc. OCGN: This Zacks Rank #4 biopharmaceutical firm is focused on discovering, developing, and commercializing therapies that address rare and underserved eye diseases. Over the past 30 days, the Zacks Consensus Estimate for 2021 has deteriorated from earnings of $1.05 a share to loss of 18 cents.
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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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Astronics Corporation (ATRO) : Free Stock Analysis Report
Carrols Restaurant Group, Inc. (TAST) : Free Stock Analysis Report
Manchester United Ltd. (MANU) : Free Stock Analysis Report
Ocugen, Inc. (OCGN) : Free Stock Analysis Report
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