Successful investing depends upon proper identification of overpriced stocks and rightly priced stocks. However, the fairly priced stocks and the overhyped toxic stocks are mingled in the marketplace in such a way that it becomes very difficult to distinguish them. Investors who can accurately figure out the toxic stocks and cast them aside at the right time are likely to benefit.

Usually, toxic stocks are susceptible to outside shocks and are burdened with high levels of debt. Also, price of the toxic stocks is unjustifiably high. The irrationally inflated price of the toxic stocks is only short-lived as the inherent value of these stocks is lower than the current bloated price.

The higher price of toxic stocks is either due to an irrational exuberance associated with them or some serious fundamental lacunae in the stock. Owning such stocks for a longer period of time may result in huge loss of wealth.

On the other hand, investors may gain from the accurate identification of toxic stocks with the help of 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, identifying toxic stocks and discarding them at the right time is the key to shield your portfolio from big losses. Profits can be made 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 16 toxic stocks that showed up on the screen:

PTC Inc. (PTC Quick QuotePTC - Free Report) is a Needham, MA-based software company engaged in developing, marketing and supporting software solutions. Over the past one-month period, current quarter estimates remained unchanged at 37 cents. The stock currently 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 Continental Resources, Inc. is a crude-oil concentrated, independent oil and natural gas exploration and production company. Over the past one-month period, its current quarter estimates remained unchanged at a penny per share. The stock currently has a Zacks Rank #3.

Houston, TX-based Apache Corporation (APA Quick QuoteAPA - Free Report) is engaged in exploration, development and production of natural gas, crude oil and natural gas liquids. Over the past one-month period, current quarter estimates declined from 11 cents to 8 cents per share. The stock currently has a Zacks Rank #3.

Quincy, IL-based Titan International, Inc. is engaged in manufacturing and sale of wheels, tires, wheel and tire assemblies, and undercarriage systems and components for off-highway vehicles. Over the past one-month period, current quarter estimates have remained unchanged at a penny per share. The stock currently has a Zacks Rank #4 (Sell).

Vancouver, Canada-based First Majestic Silver Corp. (AG Quick QuoteAG - Free Report) is engaged in the production, development, exploration, and acquisition of silver mines in Mexico. Over the past one-month period, current quarter estimates have changed from a gain of 5 cents per share to a loss of a penny.
The stock currently has a Zacks Rank #5 (Strong Sell).

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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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