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5 Toxic Stocks to Steer Clear Of Before It's Too Late
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Not all stocks that recently scaled lofty heights will be able to sustain their good show. In fact, some of these stocks, whose current value surpassed their actual potential, are bound to result in loss for investors over time.
No matter what the broader market is doing, stocks without sturdy fundamentals are toxic for your portfolio. Identifying such bloated stocks accurately and dumping them at the right time can protect your returns.
Overpricing of these toxic stocks can be ascribed to either an irrational exuberance associated with them or some serious fundamental drawbacks. And if you own such stocks for a long period of time, you are likely to see significant erosion of your wealth.
However, if you can rightly figure out such 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 buy it when the price falls.
While short selling excels in bear markets, it typically loses money in bull markets.
So, just like picking promising stocks, detecting toxic stocks and discarding them at the right time is crucial to shielding one’s portfolio from big 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 16 stocks that made it through the screen:
Covanta Holding Corporation is a Morristown, NJ-based alternative energy company which provides waste and energy services in the U.S. and Canada. Over the past 30 days, its current quarter estimate has remained unchanged at14 cents per share. The company has a Zacks Rank #5 (Strong Sell).
Pleasanton, CA-based ZELTIQ Aesthetics, Inc. is a medical technology company. Over the past 30 days, its current quarter estimate has declined 33.3% to 6 cents per share. The company carries a Zacks Rank #3 (Hold).
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.
Live Nation Entertainment, Inc. (LYV - Free Report) is a Beverly Hills, CA-based live entertainment company. Over the past 30 days, the current quarter estimate has declined5.8% to49 cents per share. The stock currently has a Zacks Rank #3.
Boston, MA-based, Vertex Pharmaceuticals Incorporated (VRTX - Free Report) is a bio-technology company. Over the past one-month period, the current quarter estimate has moved down from 9 cents a share to a no loss, no gain situation. The stock currently has a Zacks Rank #3.
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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5 Toxic Stocks to Steer Clear Of Before It's Too Late
Not all stocks that recently scaled lofty heights will be able to sustain their good show. In fact, some of these stocks, whose current value surpassed their actual potential, are bound to result in loss for investors over time.
No matter what the broader market is doing, stocks without sturdy fundamentals are toxic for your portfolio. Identifying such bloated stocks accurately and dumping them at the right time can protect your returns.
Overpricing of these toxic stocks can be ascribed to either an irrational exuberance associated with them or some serious fundamental drawbacks. And if you own such stocks for a long period of time, you are likely to see significant erosion of your wealth.
However, if you can rightly figure out such 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 buy it when the price falls.
While short selling excels in bear markets, it typically loses money in bull markets.
So, just like picking promising stocks, detecting toxic stocks and discarding them at the right time is crucial to shielding one’s portfolio from big 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 16 stocks that made it through the screen:
Covanta Holding Corporation is a Morristown, NJ-based alternative energy company which provides waste and energy services in the U.S. and Canada. Over the past 30 days, its current quarter estimate has remained unchanged at14 cents per share. The company has a Zacks Rank #5 (Strong Sell).
Pleasanton, CA-based ZELTIQ Aesthetics, Inc. is a medical technology company. Over the past 30 days, its current quarter estimate has declined 33.3% to 6 cents per share. The company carries a Zacks Rank #3 (Hold).
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.
Live Nation Entertainment, Inc. (LYV - Free Report) is a Beverly Hills, CA-based live entertainment company. Over the past 30 days, the current quarter estimate has declined5.8% to49 cents per share. The stock currently has a Zacks Rank #3.
Boston, MA-based, Vertex Pharmaceuticals Incorporated (VRTX - Free Report) is a bio-technology company. Over the past one-month period, the current quarter estimate has moved down from 9 cents a share to a no loss, no gain situation. The stock currently has a Zacks Rank #3.
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 »