Investment in a stock with valuation above its true potential is bound to translate to loss over time. Overvaluation implies that the current price of the stock is not justified by its business conditions. Therefore, a decline in price is inevitable.
A stock becomes overpriced due to irrational exuberance associated with it or some serious weakness in the company’s fundamentals. As a result, owning these stocks could lead to erosion of wealth for an investor.
Investors who can identify toxic stocks can actually gain even in a bear market by resorting to an investing technique called short selling.
In short selling, one can sell an un-owned stock and then purchase it when the price falls. Naturally, short selling has excelled in bear markets, while it typically loses money in bull markets.
So, just like selecting good stocks, identifying toxic stocks is also crucial in shielding one’s portfolio from massive losses or making profit 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 highly 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 five of the 37 stocks that made it through the screen:
Novanta Inc. NOVT: This Zacks Rank #4 (Sell) company manufactures and sells precision photonic and motion control components and subsystems to OEMs in the medical equipment and advanced industrial technology markets.Over the past 30 days, its 2020 earnings estimates have declined by 53 cents.
SiteOne Landscape Supply, Inc. SITE: The firm, carrying a Zacks Rank #4, is a wholesale distributor of landscape supplies primarily in the United States. Over the past 60 days, its 2020 earnings estimates have declined by 78 cents.
Adient PLC ADNT: Dublin-based Adient is one of the world’s largest automotive seating suppliers. Over the past 30 days, the 2020 Zacks Consensus Estimate for this Zacks Rank #3 company has deteriorated to a loss of 1.45 cents from earnings of 7 cents per share.
The Trade Desk Inc. TTD: California-based firm is a provider of technology platform for advertising. Over the past 30 days, its 2020 earnings estimates have declined by 17 cents. Currently, the firm carries a Zacks Rank #3.
Sina Corporation SINA: Headquartered in Shanghai, Sina is a leading provider of online media and value-added information services to Chinese communities across the globe. Over the past 30 days, its 2020 earnings estimates have declined by 60 cents. Currently, the firm carries a Zacks Rank #3.
Yelp Inc. (YELP): San Francisco, CA-based Yelp is a website engaged in providing information through the online community offering social networking. Currently, the firm carries a Zacks Rank #3. Over the past 30 days, its 2020 earnings estimates have declined by 21 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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Sina Corporation (SINA) : Free Stock Analysis Report
The Trade Desk Inc. (TTD) : Free Stock Analysis Report
Adient PLC (ADNT) : Free Stock Analysis Report
SiteOne Landscape Supply, Inc. (SITE) : Free Stock Analysis Report
Novanta Inc. (NOVT) : Free Stock Analysis Report
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