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Precise identification of overpriced stocks and rightly priced stocks holds the key to successful investing. However, it is not easy to do so as the correctly priced stocks and the bubble stocks are deceptively intermixed in the market place. Investors who can figure out the overpriced toxic stocks and dump them at the right time are poised to benefit.
In general, toxic stocks are burdened with huge debts and are vulnerable to external shocks. Moreover, unreasonably inflated price of the toxic stocks can’t sustain for a long time as the current price of these stocks is higher than their intrinsic value. These stocks are sure to result in losses for investors over time.
Inflated price of the toxic stocks can be ascribed to either an irrational exuberance associated with them or some serious fundamental lacuna. If you own such stocks for a longer period of time, you are likely to witness big erosion in your wealth.
However, if you can precisely spot the 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 figuring out stocks with growth potential, identifying toxic stocks and discarding them at the right time is the key 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 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 and the next fiscal year during the past 12 weeks points 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 13 toxic stocks that showed up on the screen:
Etsy, Inc. (ETSY - Free Report) is a Brooklyn, NY-based Internet services company. It operates a marketplace to make, sell and buy goods online and offline worldwide. Over the last 30 days, its 2016 loss estimate has narrowed down from a loss of 8 cents per share to a loss of 7 cents. The company has a Zacks Rank #3.
Abercrombie & Fitch Co. (ANF - Free Report) is a New Albany, OH-based specialty retailer. Over the past one-month period, its 2017 loss estimate has widened from a loss of 5 cents to a loss of 6 cents. The stock currently has a Zacks Rank #5 (Strong Sell).
Boston, MA-based, Vertex Pharmaceuticals Incorporated (VRTX - Free Report) is a bio-technology company. Over the past one-month period, the 2017 estimate declined 44.8% to 48 cents. The stock currently has a Zacks Rank #3.
Bottomline Technologies (de), Inc. is a Portsmouth, NH-based computer software company. Over the past one-month period, the 2017 estimate declined 26.3% to 28 cents per share. 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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5 Toxic Stocks to Dump or Play Short for Gains
Precise identification of overpriced stocks and rightly priced stocks holds the key to successful investing. However, it is not easy to do so as the correctly priced stocks and the bubble stocks are deceptively intermixed in the market place. Investors who can figure out the overpriced toxic stocks and dump them at the right time are poised to benefit.
In general, toxic stocks are burdened with huge debts and are vulnerable to external shocks. Moreover, unreasonably inflated price of the toxic stocks can’t sustain for a long time as the current price of these stocks is higher than their intrinsic value. These stocks are sure to result in losses for investors over time.
Inflated price of the toxic stocks can be ascribed to either an irrational exuberance associated with them or some serious fundamental lacuna. If you own such stocks for a longer period of time, you are likely to witness big erosion in your wealth.
However, if you can precisely spot the 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 figuring out stocks with growth potential, identifying toxic stocks and discarding them at the right time is the key 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 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 and the next fiscal year during the past 12 weeks points 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 13 toxic stocks that showed up on the screen:
Etsy, Inc. (ETSY - Free Report) is a Brooklyn, NY-based Internet services company. It operates a marketplace to make, sell and buy goods online and offline worldwide. Over the last 30 days, its 2016 loss estimate has narrowed down from a loss of 8 cents per share to a loss of 7 cents. The company has a Zacks Rank #3.
Wilmington, DE-based Incyte Corporation (INCY - Free Report) is a drug discovery company. Over the last 30 days, its fourth-quarter 2016 estimate declined 6.7% to 14 cents per share. Incyte carries a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Abercrombie & Fitch Co. (ANF - Free Report) is a New Albany, OH-based specialty retailer. Over the past one-month period, its 2017 loss estimate has widened from a loss of 5 cents to a loss of 6 cents. The stock currently has a Zacks Rank #5 (Strong Sell).
Boston, MA-based, Vertex Pharmaceuticals Incorporated (VRTX - Free Report) is a bio-technology company. Over the past one-month period, the 2017 estimate declined 44.8% to 48 cents. The stock currently has a Zacks Rank #3.
Bottomline Technologies (de), Inc. is a Portsmouth, NH-based computer software company. Over the past one-month period, the 2017 estimate declined 26.3% to 28 cents per share. 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 »