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5 Toxic Stocks to Dump for a Healthy Portfolio

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Investing in a stock whose valuation exceeds its true potential generally results in a loss over time. The bloated current price of a stock that is not justified by its fundamentals will almost inevitably see a drop. Detecting such toxic stocks on a regular basis and getting rid off them is one of the keys to successful investing.

Irrational exuberance or some serious drawbacks associated with a stock may result in its overpricing. And if you own such stocks for an inordinate period, they could lead to massive erosion of your wealth.

On the other hand, if you can pick toxic stocks, you may gain in a bear market by resorting to an investing strategy, known as short selling – in which one can sell a stock first and then purchase it when its price falls. However, short selling typically loses money in bull markets.

So, just like selecting good stocks, identifying toxic stocks and discarding them at right time is vital to shielding 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 -10: NegativeEPS estimate revision for this fiscal year and the 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:

Clean Harbors, Inc. (CLH - Free Report)

Global Eagle Entertainment Inc.

InvenSense, Inc.

Live Nation Entertainment, Inc. (LYV - Free Report)

Lumos Networks Corp.

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.

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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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