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Owning a toxic stock whose current price is not supported by its actual fundamental strength is sure to result into loss over time. Toxic companies are usually characterized by huge debt burdens and are vulnerable to external shocks. Spotting these overvalued stocks and unloading them at the right time is the key to a successful investment strategy.
Overpricing of toxic stocks may be ascribed to the irrational exuberance associated with them or due to some serious fundamental lacunae. And if you own such stocks for an inordinate period of time, they could cause massive damage to your wealth.
However, if you can pinpoint 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 identifying promising stocks, picking up toxic stocks and unloading them at the right time is crucial to shield one’s portfolio from huge 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 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 Buy-rated stocks that generally outperform the market.
Here are five of the 18 stocks that made it through the screen:
Capital Senior Living Corp. based in Dallas, TX is engaged in providing senior living services in the U.S. Over the last 30 days, its quarterly estimate has moved down from 2 cents a share to a no loss, no gain situation. Capital Senior Living carries a Zacks Rank #3 (Hold).
Glendale, CA-based DreamWorks Animation SKG Inc. is engaged in developing and producing computer generated animated feature films for a broad movie-going audience. Over the past one-month period, its current quarter earnings estimate has widened from a loss of 2 cents per share to a loss of 5 cents. The stock currently has a Zacks Rank #3.
Pleasanton, CA-based ZELTIQ Aesthetics, Inc. is a medical technology company. Over the past 30 days, its current quarter estimate has moved down 22.2% to 7 cents per share. The company has a Zacks Rank #3.
HERC Holdings, Inc. (HRI - Free Report) is a Bonita Springs, FL-based full-line equipment-rental supplier in North America. Over the past 30 days, its current quarter estimate has remained unchanged at 49 cents per share. The company has a Zacks Rank #3.
PTC Inc. (PTC - Free Report) is a Needham, MA-based software company engaged in developing, marketing and supporting software solutions. Over the past one-month period, the current quarter earnings estimate has declined around 19.4% to 29 cents. The stock currently has a Zacks Rank #4 (Sell).
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.
Zacks Restaurant Recommendations: In addition to dining at these special places, you can feast on their stock shares. A Zacks Special Report spotlights 5 recent IPOs to watch plus 2 stocks that offer immediate promise in a booming sector. Download it free »
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Keep These 5 Toxic Stocks Off Your Portfolio
Owning a toxic stock whose current price is not supported by its actual fundamental strength is sure to result into loss over time. Toxic companies are usually characterized by huge debt burdens and are vulnerable to external shocks. Spotting these overvalued stocks and unloading them at the right time is the key to a successful investment strategy.
Overpricing of toxic stocks may be ascribed to the irrational exuberance associated with them or due to some serious fundamental lacunae. And if you own such stocks for an inordinate period of time, they could cause massive damage to your wealth.
However, if you can pinpoint 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 identifying promising stocks, picking up toxic stocks and unloading them at the right time is crucial to shield one’s portfolio from huge 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 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 Buy-rated stocks that generally outperform the market.
Here are five of the 18 stocks that made it through the screen:
Capital Senior Living Corp. based in Dallas, TX is engaged in providing senior living services in the U.S. Over the last 30 days, its quarterly estimate has moved down from 2 cents a share to a no loss, no gain situation. Capital Senior Living carries a Zacks Rank #3 (Hold).
Glendale, CA-based DreamWorks Animation SKG Inc. is engaged in developing and producing computer generated animated feature films for a broad movie-going audience. Over the past one-month period, its current quarter earnings estimate has widened from a loss of 2 cents per share to a loss of 5 cents. The stock currently has a Zacks Rank #3.
Pleasanton, CA-based ZELTIQ Aesthetics, Inc. is a medical technology company. Over the past 30 days, its current quarter estimate has moved down 22.2% to 7 cents per share. The company has a Zacks Rank #3.
HERC Holdings, Inc. (HRI - Free Report) is a Bonita Springs, FL-based full-line equipment-rental supplier in North America. Over the past 30 days, its current quarter estimate has remained unchanged at 49 cents per share. The company has a Zacks Rank #3.
PTC Inc. (PTC - Free Report) is a Needham, MA-based software company engaged in developing, marketing and supporting software solutions. Over the past one-month period, the current quarter earnings estimate has declined around 19.4% to 29 cents. The stock currently has a Zacks Rank #4 (Sell).
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.
Zacks Restaurant Recommendations: In addition to dining at these special places, you can feast on their stock shares. A Zacks Special Report spotlights 5 recent IPOs to watch plus 2 stocks that offer immediate promise in a booming sector. Download it free »