Investors who can correctly distinguish between overblown/inflated toxic stocks and the fairly priced stocks emerge successful at the end. But, accurately distinguishing the two is not at all easy. In fact, investors who can precisely identify the toxic stocks and abandon them at the right time are set to benefit.
Usually, overpriced toxic stocks are vulnerable to external shocks and are burdened with huge amount of debts. Moreover, the price of the toxic stocks is unreasonably high. The artificially high price of the toxic stock is only temporary as the intrinsic value of the toxic stocks 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 associated with the stock. Owning such stocks for a long period of time can be detrimental to investors and may lead to huge erosion of wealth.
On the other side, investors may profit from the precise identification of toxic stocks with the help of an investing strategy known as short selling. This strategy allows them 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, identifying toxic stocks and getting rid of them at the right time is the key to guard your portfolio from big losses. Profits can be made by short selling them.
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 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 Buy-rated stocks that generally outperform the market.
Here are five of the 30 toxic stocks that showed up on the screen:
Norwell, MA-based Clean Harbors, Inc. CLH is a leading provider of environmental, energy and industrial services in North America. Over the past month, the Zacks Consensus Estimate for the current quarter declined from 20 cents per share to 6 cents. The stock currently has a Zacks Rank #5 (Strong Sell).
PTC Inc. PTC is a Needham, MA-based software company engaged in developing, marketing and supporting software solutions. Over the past month, the Zacks Consensus Estimate for current quarter earnings declined from 31 cents per share to 30 cents. The stock currently has a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Leawood, KS-based AMC Entertainment Holdings, Inc. AMC is engaged in the theatrical exhibition business. Over the past month, the Zacks Consensus Estimate for current quarter earnings declined from 51 cents per share to 32 cents. The stock currently has a Zacks Rank #3.
Quincy, IL-based Titan International, Inc. TWI is engaged in manufacturing and sale of wheels, tires, wheel and tire assemblies, and undercarriage systems and components for off-highway vehicles. Over the past month, the Zacks Consensus Estimate for current quarter loss widened from 8 cents per share to 13 cents. The stock currently has a Zacks Rank #3.
Hanover, MD-based The KEYW Holding Corporation KEYW is engaged in providing cyber security and cyber superiority solutions. Over the past month, the Zacks Consensus Estimate for the current quarter declined from earnings of 13 cents per share to a loss of 3 cents. The stock currently has a Zacks Rank #4 (Sell).
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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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