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5 Toxic Stocks to Abandon or Play Short

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The secret of successful investing lies in the proper identification of overpriced stocks and reasonably priced stocks. In a complex market place, the overblown stocks and the correctly priced ones are intertwined in such a way that it is not easy to distinguish between them. However, spotting the bloated toxic stocks on a regular basis and abandoning them at the right time is one of the secrets to a winning investment strategy.

Usually, toxic companies are characterized by huge debt burdens and are vulnerable to external shocks. Irrationally high price of the toxic stocks is short-lived as their current price is higher than their intrinsic value and these are bound to result into loss for investors over time.

Overpricing of the toxic stocks can be ascribed to either an irrational exuberance 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.

However, if you are a smart investor and can precisely spot such toxic stocks, you may gain by resorting to an investing strategy called short selling. This strategy allows you 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 pinpointing stocks with growth potential, identifying toxic stocks and discarding them at the right time is crucial to shield your portfolio from big losses or make profits by short selling them.

Screening Criteria

Here is a winning strategy that will help you identify the overhyped 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 and the next fiscal year during the past 12 weeks point to analysts’ pessimism.

Zacks Rank more than or equal to #3 (Hold): We have not considered Buy-rated stocks that generally outperform the market.

Here are five of the 14 toxic stocks that showed up on 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, quarterly estimates changed from a no loss, no gain situation to a loss of 1 cent. Capital Senior Living carries a Zacks Rank #5 (Strong Sell).

Boulder, CO-based Zayo Group Holdings, Inc. is a provider of bandwidth infrastructure solutions to the communications industry in the U.S., Canada, and Europe. Over the last 30 days, quarterly estimates remained stable at 5 cents a share. The company has a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Oklahoma City, OK-based Paycom Software, Inc. (PAYC - Free Report) is an Internet Software industry firm, which provides cloud-based human capital management software solutions. Over the last 30 days, quarterly estimates changed from 3 cents a share to a no loss, no gain situation. Currently, the company carries 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 quarterly estimate has declined 20.6% to 23 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 remained unchanged at 6 cents per share. The company carries a Zacks Rank #3.

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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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