Investing in a stock whose current valuation exceeds its true inherent potential, is bound to result in loss over time. Spotting such toxic stocks accurately on a regular basis and dumping them at the right time is one of the keys to a winning investing strategy.
Overpricing of these toxic stocks can be ascribed to irrational exuberance associated with them. And if you own such stocks for an unreasonable period, they could end up significantly eroding your wealth.
However, if you can detect toxic stocks, you may gain in a bear market by resorting to an investing strategy called short selling. This strategy allows one to sell a stock first and then purchase it when its price falls.
Naturally, short selling excels in bear markets, while it typically loses money in bull markets.
So, just like picking up promising stocks, identifying toxic stocks and dumping them at the right time is crucial to guarding one’s portfolio from massive losses or making profits by short selling them.
Screening Criteria
Here is a winning strategy that will help you identify the over-hyped toxic stocks:
• Most recent Debt/Equity Ratio greater than the median industry average: High debt/equity ratio implies high leverage. And 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 next fiscal year during the past 12 weeks point to analysts’ pessimism.
• Zacks Rank more than or equal to #3: We have not considered the Buy-rated stocks that generally outperform the market.
Here are five of the 12 stocks that made it through the screen:
Antero Resources Corporation AR is a Denver, CO-based company engaged in the exploration, development and acquisition of natural gas and oil properties in the U.S. Its current quarter estimate has remained unchanged at a loss of 3 cents per share over the past 30 days. But over the past two months, the estimate has been revised down from earnings of a penny per share to a loss of 3 cents. Antero Resources carries a Zacks Rank #3 (Hold).
Pleasanton, CA-based ZELTIQ Aesthetics, Inc. ZLTQ is a medical technology company. Over the past 30 days, its current quarter estimate has remained unchanged at a loss of 7 cents per share but over a 60-day period, the estimate has widened from a loss of 1 cent to a loss of 7 cents per share. Presently, the company has a Zacks Rank #3.
Boston, MA-based, Vertex Pharmaceuticals Incorporated VRTX is a bio-technology company. Over the past one-month period, the current quarter earnings estimate has remained unchanged at 5 cents per share, but over the past two months, it has been revised down around 79% to 5 cents. The stock currently has a Zacks Rank #5 (Strong Sell).
ViaSat Inc. VSAT is a Carlsbad, CA-based wireless equipment company. Over the past two months, the current quarter earnings estimate has remained unchanged at 15 cents per share. The stock currently has a Zacks Rank #4 (Sell).
Lumos Networks Corp. LMOS is a Waynesboro, VA-based diversified communication services firm. Over the past one-month period, the current quarter earnings estimate has remained unchanged at 33 cents per share, but over the past two months, it has been revised up 50% to 3 cents. The stock currently has 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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