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It’s as important to get rid of fundamentally weak toxic stocks as it is to invest in attractively valued companies possessing fundamental strength. Toxic companies are usually characterized by huge debt loads and are vulnerable to external shocks. These stocks might illusively scale lofty heights in a given time period but the good show doesn’t last for these overblown toxic stocks, as their current price is not justified by their fundamental strength. Accurately identifying such bloated stocks and getting rid of them at the right time can protect your portfolio.
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. Bally’s Corporation (BALY - Free Report) , Omnicell, Inc. (OMCL - Free Report) , Atlantica Sustainable Infrastructure PLC (AY - Free Report) and TFS Financial Corporation (TFSL - Free Report) are a few such toxic stocks.
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 25 toxic stocks that showed up on the screen:
Bally’s is a gaming, hospitality and entertainment company that engages in casinos, resorts, and online gaming in the United States. The company offers interactive entertainment experiences through its traditional casino offerings as well as its online sportsbook, bingo, daily fantasy and iCasino. The Zacks Consensus Estimate for BALY’s 2023 bottom line is pegged at a loss of 2 cents per share, implying a year-over-year deterioration of 102%. The consensus mark has moved south from earnings of 15 cents per share to a loss of 2 cents per share over the past 30 days. Bally’s missed earnings estimates in two out of the last four quarters for as many misses, with the average negative surprise being 29.5%. The company carries a Zacks Rank #5 (Strong Sell).
Omnicell develops and markets end-to-end automation solutions for the medication-use process. These automation solutions contain medication and supply dispensing systems, central pharmacy storage, retrieval and packaging solutions, a bedside automation solution, a physician order management solution, a decision support application and a web-based procurement application. The Zacks Consensus Estimate for Omnicell’s 2023 earnings per share implies a year-over-year decline of 29%. The consensus mark for 2023 EPS has moved south by 8 cents over the past 30 days. Omnicell missed earnings estimates in two out of the last four quarters for as many misses. The stock currently carries a Zacks Rank #5 and has a VGM Score of F.
Atlantica Sustainable provides renewable energy solutions. The firm owns and operates natural gas fields, as well as offers transmission, transportation infrastructures and water assets solutions. Formerly known as Atlantica Yield plc, AY is based in Brentford, UK. Atlantica Sustainable has fallen short of earnings estimates in each of the last four quarters, with the average negative surprise being 99%. The Zacks Consensus Estimate for Atlantica Yield’s 2022 bottom line is pegged at a loss of 30 cents a share and implies a year-over-year deterioration of 15.4%. The consensus mark for 2023 earnings has moved south by 22 cents over the past 30 days. AY currently carries a Zacks Rank #5 and has a VGM Score of C.
TFS Financial is a federally chartered stock holding company that conducts its activities through its wholly owned subsidiaries. The line of business of the company is retail consumer banking, mortgage lending, deposit gathering and other financial services. The company's operating subsidiaries include Third Federal Savings and Loan Association of Cleveland and Third Capital, Inc. The Zacks Consensus Estimate for TFS Financial’s fiscal 2024 earnings per share implies a year-over-year decline of 7.4%. The consensus mark for fiscal 2024 EPS has moved south by 8 cents over the past 30 days. The stock currently carries a Zacks Rank #4 (Sell) and has a VGM Score of F.
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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4 Toxic Stocks That May Not Let You Prosper
It’s as important to get rid of fundamentally weak toxic stocks as it is to invest in attractively valued companies possessing fundamental strength. Toxic companies are usually characterized by huge debt loads and are vulnerable to external shocks. These stocks might illusively scale lofty heights in a given time period but the good show doesn’t last for these overblown toxic stocks, as their current price is not justified by their fundamental strength. Accurately identifying such bloated stocks and getting rid of them at the right time can protect your portfolio.
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. Bally’s Corporation (BALY - Free Report) , Omnicell, Inc. (OMCL - Free Report) , Atlantica Sustainable Infrastructure PLC (AY - Free Report) and TFS Financial Corporation (TFSL - Free Report) are a few such toxic stocks.
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 #3 (Hold): We have not considered Buy/Hold-rated stocks that generally outperform or are in line with the market. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Stocks to Discard
Here are four of the 25 toxic stocks that showed up on the screen:
Bally’s is a gaming, hospitality and entertainment company that engages in casinos, resorts, and online gaming in the United States. The company offers interactive entertainment experiences through its traditional casino offerings as well as its online sportsbook, bingo, daily fantasy and iCasino. The Zacks Consensus Estimate for BALY’s 2023 bottom line is pegged at a loss of 2 cents per share, implying a year-over-year deterioration of 102%. The consensus mark has moved south from earnings of 15 cents per share to a loss of 2 cents per share over the past 30 days. Bally’s missed earnings estimates in two out of the last four quarters for as many misses, with the average negative surprise being 29.5%. The company carries a Zacks Rank #5 (Strong Sell).
Omnicell develops and markets end-to-end automation solutions for the medication-use process. These automation solutions contain medication and supply dispensing systems, central pharmacy storage, retrieval and packaging solutions, a bedside automation solution, a physician order management solution, a decision support application and a web-based procurement application. The Zacks Consensus Estimate for Omnicell’s 2023 earnings per share implies a year-over-year decline of 29%. The consensus mark for 2023 EPS has moved south by 8 cents over the past 30 days. Omnicell missed earnings estimates in two out of the last four quarters for as many misses. The stock currently carries a Zacks Rank #5 and has a VGM Score of F.
Atlantica Sustainable provides renewable energy solutions. The firm owns and operates natural gas fields, as well as offers transmission, transportation infrastructures and water assets solutions. Formerly known as Atlantica Yield plc, AY is based in Brentford, UK. Atlantica Sustainable has fallen short of earnings estimates in each of the last four quarters, with the average negative surprise being 99%. The Zacks Consensus Estimate for Atlantica Yield’s 2022 bottom line is pegged at a loss of 30 cents a share and implies a year-over-year deterioration of 15.4%. The consensus mark for 2023 earnings has moved south by 22 cents over the past 30 days. AY currently carries a Zacks Rank #5 and has a VGM Score of C.
TFS Financial is a federally chartered stock holding company that conducts its activities through its wholly owned subsidiaries. The line of business of the company is retail consumer banking, mortgage lending, deposit gathering and other financial services. The company's operating subsidiaries include Third Federal Savings and Loan Association of Cleveland and Third Capital, Inc. The Zacks Consensus Estimate for TFS Financial’s fiscal 2024 earnings per share implies a year-over-year decline of 7.4%. The consensus mark for fiscal 2024 EPS has moved south by 8 cents over the past 30 days. The stock currently carries a Zacks Rank #4 (Sell) and has a VGM Score of F.
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.