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Cleanse Your Portfolio by Discarding These 4 Toxic Stocks
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To get rid of fundamentally weak toxic stocks is just as important as it is to invest in fundamentally strong companies. Toxic companies are usually characterized by huge debt loads and are vulnerable to external shocks. If you want to protect your portfolio health, make sure to identify such toxic stocks and dump them right away. Madison Square Garden Entertainment (MSGE - Free Report) , TripAdvisor, Inc. (TRIP - Free Report) , Shift4 Payments (FOUR - Free Report) andCano Health Inc. are a few such toxic stocks.
There are always some stocks that illusively scale lofty heights in a given time period. Yet, the good show doesn’t last for these overblown toxic stocks, as their current price is not justified by their fundamental strength. Overpricing of these toxic stocks can be attributed to either an irrational enthusiasm 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.
Nonetheless, if you can precisely spot such toxic stocks, you may gain by resorting to an investing strategy called short selling. This strategy allows one 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 identifying stocks with growth potential, pinpointing toxic stocks and offloading them at the right time is crucial to guard one’s portfolio from big losses or make profits 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 fiscal year and the next during the past 12 weeks points to analysts’ pessimism.
Here are four of the 37 toxic stocks that showed up on the screen:
Shift4 Payments is a provider of integrated payment processing and technology solutions. The company is based in Allentown and provides a complete omnichannel ecosystem that includes payment and other commerce-enabling services.
Over the trailing four quarters, Shift4Payments missed earnings estimates in three of the last four quarters, and matched once, the average negative surprise being 27%. The Zacks Consensus Estimate for FOUR’s earnings for the current year has moved south by 21 cents to $1.04 per share over the past 30 days. The consensus mark for earnings for the next year has also declined 46 cents over the past 30 days. Shift4Payments currently carries a Zacks Rank #5 (Strong Sell) and has a VGM Score of D.
Madison Square provides entertainment experiences. The company presents or hosts events at its diverse venues: New York's Madison Square Garden, Hulu Theater at Madison Square Garden, Radio City Music Hall and Beacon Theatre; the Forum in Inglewood, CA and The Chicago Theatre. Also, under the MSG Entertainment umbrella is Tao Group Hospitality, with entertainment dining and nightlife brands, including Tao, Marquee, Lavo, Avenue, Beauty & Essex and Cathédrale.
Madison Square missed earnings estimates in three of the last four quarters, and matched once, the average negative surprise being 56.4%. The Zacks Consensus Estimate for MSGE’s loss for fiscal 2022 is pegged at $2.10 a share. The estimate has moved south by 82 cents per share over the past 30 days. The consensus mark for earnings for the next year has also declined 17 cents over the past 30 days. Madison Square currently carries a Zacks Rank #4 (Sell) and has a VGM Score of C.
TripAdvisor is one of the largest online travel research companies in the world. The company provides a platform for users to share reviews, ratings and opinions on hotels, destinations, attractions and restaurants. The company also facilitates bookings between hotel suppliers and consumers using its web portals.
In the trailing four quarters, TripAdvisor missed earnings estimates on all occasions, with the average negative surprise being 47%. The Zacks Consensus Estimate for TRIP’s earnings for the current year has moved south by 40 cents to 85 cents per share over the past 30 days. The consensus mark for earnings for the next year has also declined 16 cents over the past 30 days. TripAdvisor currently carries a Zacks Rank #4 and has a VGM Score of F.
Cano Health is a healthcare provider for seniors and underserved communities. It offers health management programs including telehealth, prescription home delivery, wellness programs, transition of care and high-risk and complex care management.
In the last reported quarter, CANO incurred a loss of 2 cents a share, wider than the consensus mark of a penny. The Zacks Consensus Estimate for Cano Health’s 2021 loss is pegged at 2 cents a share. The consensus mark for 2022 earnings has moved south by 2 cents over the past 30 days. Cano Health currently carries a Zacks Rank #4 and has a VGM Score of C.
Get the rest of the stocks on the list and start putting this and other ideas to the test. It can all be done with the Research Wizard stock picking and backtesting software.
The Research Wizard is a great place to begin. It's easy to use. Everything is in plain language. And it's very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.
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.
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Cleanse Your Portfolio by Discarding These 4 Toxic Stocks
To get rid of fundamentally weak toxic stocks is just as important as it is to invest in fundamentally strong companies. Toxic companies are usually characterized by huge debt loads and are vulnerable to external shocks. If you want to protect your portfolio health, make sure to identify such toxic stocks and dump them right away. Madison Square Garden Entertainment (MSGE - Free Report) , TripAdvisor, Inc. (TRIP - Free Report) , Shift4 Payments (FOUR - Free Report) andCano Health Inc. are a few such toxic stocks.
There are always some stocks that illusively scale lofty heights in a given time period. Yet, the good show doesn’t last for these overblown toxic stocks, as their current price is not justified by their fundamental strength. Overpricing of these toxic stocks can be attributed to either an irrational enthusiasm 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.
Nonetheless, if you can precisely spot such toxic stocks, you may gain by resorting to an investing strategy called short selling. This strategy allows one 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 identifying stocks with growth potential, pinpointing toxic stocks and offloading them at the right time is crucial to guard one’s portfolio from big losses or make profits 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 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 37 toxic stocks that showed up on the screen:
Shift4 Payments is a provider of integrated payment processing and technology solutions. The company is based in Allentown and provides a complete omnichannel ecosystem that includes payment and other commerce-enabling services.
Over the trailing four quarters, Shift4Payments missed earnings estimates in three of the last four quarters, and matched once, the average negative surprise being 27%. The Zacks Consensus Estimate for FOUR’s earnings for the current year has moved south by 21 cents to $1.04 per share over the past 30 days. The consensus mark for earnings for the next year has also declined 46 cents over the past 30 days. Shift4Payments currently carries a Zacks Rank #5 (Strong Sell) and has a VGM Score of D.
Madison Square provides entertainment experiences. The company presents or hosts events at its diverse venues: New York's Madison Square Garden, Hulu Theater at Madison Square Garden, Radio City Music Hall and Beacon Theatre; the Forum in Inglewood, CA and The Chicago Theatre. Also, under the MSG Entertainment umbrella is Tao Group Hospitality, with entertainment dining and nightlife brands, including Tao, Marquee, Lavo, Avenue, Beauty & Essex and Cathédrale.
Madison Square missed earnings estimates in three of the last four quarters, and matched once, the average negative surprise being 56.4%. The Zacks Consensus Estimate for MSGE’s loss for fiscal 2022 is pegged at $2.10 a share. The estimate has moved south by 82 cents per share over the past 30 days. The consensus mark for earnings for the next year has also declined 17 cents over the past 30 days. Madison Square currently carries a Zacks Rank #4 (Sell) and has a VGM Score of C.
TripAdvisor is one of the largest online travel research companies in the world. The company provides a platform for users to share reviews, ratings and opinions on hotels, destinations, attractions and restaurants. The company also facilitates bookings between hotel suppliers and consumers using its web portals.
In the trailing four quarters, TripAdvisor missed earnings estimates on all occasions, with the average negative surprise being 47%. The Zacks Consensus Estimate for TRIP’s earnings for the current year has moved south by 40 cents to 85 cents per share over the past 30 days. The consensus mark for earnings for the next year has also declined 16 cents over the past 30 days. TripAdvisor currently carries a Zacks Rank #4 and has a VGM Score of F.
Cano Health is a healthcare provider for seniors and underserved communities. It offers health management programs including telehealth, prescription home delivery, wellness programs, transition of care and high-risk and complex care management.
In the last reported quarter, CANO incurred a loss of 2 cents a share, wider than the consensus mark of a penny. The Zacks Consensus Estimate for Cano Health’s 2021 loss is pegged at 2 cents a share. The consensus mark for 2022 earnings has moved south by 2 cents over the past 30 days. Cano Health currently carries a Zacks Rank #4 and has a VGM Score of C.
Get the rest of the stocks on the list and start putting this and other ideas to the test. It can all be done with the Research Wizard stock picking and backtesting software.
The Research Wizard is a great place to begin. It's easy to use. Everything is in plain language. And it's very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.
Click here to sign up for a free trial to the Research Wizard today.
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.