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5 Toxic Stocks to Steer Clear Of or Play Short Right Now
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Investors who can precisely identify overpriced stocks are likely to emerge winners. In practice, the correctly priced stocks and the overblown toxic stocks are mingled in the market place in such a way that it becomes tough to identify them. Investors who can figure out the overpriced stocks and shun them at the right time are the ones who are likely to benefit.
Generally, toxic stocks are vulnerable to external shocks and burdened with huge debts. In fact, the unreasonably high price of the toxic stocks is short-lived as the current price of these stocks is higher than their intrinsic price. So, quite obviously, if you own such toxic stocks for a very long period of time, you are sure to see huge loss in your wealth.
High price of the toxic stocks can be ascribed to an irrational exuberance associated with them or some serious fundamental lacunae. Presence of such stocks in your portfolio may result in loss of 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 owning stocks with growth potential, distinguishing toxic stocks and discarding them at the right time is the key to guard 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 26 toxic stocks that showed up on the screen:
Covanta Holding Corporation is a Morristown, NJ-based alternative energy company that provides waste and energy services in the U.S. and Canada. Over the past 30 days, its second-quarter 2017 estimate widened from a loss of 11 cents per share to a loss of 15 cents. The company has a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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 estimates declined 26.1% to 17 cents. The stock currently has a Zacks Rank #3.
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 current quarter estimate changed from a break-even point to a loss of a penny per share. The company 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 second-quarter 2017 estimate declined 66.7% to 5 cents a share. The stock currently has a Zacks Rank #3.
Live Nation Entertainment, Inc. (LYV - Free Report) is a Beverly Hills, CA-based live entertainment company. Over the past seven days, its second-quarter 2017 estimate remained unchanged at 17 cents a share.
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 or Play Short Right Now
Investors who can precisely identify overpriced stocks are likely to emerge winners. In practice, the correctly priced stocks and the overblown toxic stocks are mingled in the market place in such a way that it becomes tough to identify them. Investors who can figure out the overpriced stocks and shun them at the right time are the ones who are likely to benefit.
Generally, toxic stocks are vulnerable to external shocks and burdened with huge debts. In fact, the unreasonably high price of the toxic stocks is short-lived as the current price of these stocks is higher than their intrinsic price. So, quite obviously, if you own such toxic stocks for a very long period of time, you are sure to see huge loss in your wealth.
High price of the toxic stocks can be ascribed to an irrational exuberance associated with them or some serious fundamental lacunae. Presence of such stocks in your portfolio may result in loss of 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 owning stocks with growth potential, distinguishing toxic stocks and discarding them at the right time is the key to guard 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 26 toxic stocks that showed up on the screen:
Covanta Holding Corporation is a Morristown, NJ-based alternative energy company that provides waste and energy services in the U.S. and Canada. Over the past 30 days, its second-quarter 2017 estimate widened from a loss of 11 cents per share to a loss of 15 cents. The company has a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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 estimates declined 26.1% to 17 cents. The stock currently has a Zacks Rank #3.
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 current quarter estimate changed from a break-even point to a loss of a penny per share. The company 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 second-quarter 2017 estimate declined 66.7% to 5 cents a share. The stock currently has a Zacks Rank #3.
Live Nation Entertainment, Inc. (LYV - Free Report) is a Beverly Hills, CA-based live entertainment company. Over the past seven days, its second-quarter 2017 estimate remained unchanged at 17 cents a share.
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 »