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Dispose of These 5 Toxic Stocks or Sell Short for Gains
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One of the keys to successful investing is precise identification of overhyped toxic stocks and the correctly priced ones. But it is not easy to accurately distinguish between these two types of stocks. Investors who can correctly spot the toxic stocks and get rid of them at the right time are likely to benefit at the end.
Usually, overblown toxic stocks are susceptible to external shocks and are loaded with hefty amount of debts. Also, the price of the toxic stocks is unjustifiably high. The high price of toxic stocks is only short-lived as the current bloated price of the toxic stocks is higher than its intrinsic value.
The exorbitant price of toxic stocks can be due to either an irrational exuberance associated with them or some fundamental drawbacks associated with the stock. Owning such stocks for a long stretch of time can be detrimental to investors and may result in huge erosion of wealth.
Investors may gain from the accurate identification of toxic stocks with the help of an investing strategy known as short selling. This strategy allows them 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, picking up toxic stocks and discarding them at the right time is the key to protect 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 25 toxic stocks that showed up on the screen:
Leawood, KS-based AMC Entertainment Holdings, Inc. (AMC - Free Report) is engaged in the theatrical exhibition business. Over the past month, the Zacks Consensus Estimate for current quarter earnings declined from 34 cents per share to 32 cents. The stock currently has a Zacks Rank #3.
Buenos Aires, Argentina-based Mercadolibre, Inc. (MELI - Free Report) is a leading online trading platform in Latin America. Over the past month, the Zacks Consensus Estimate for current quarter earnings remained unchanged at 58 cents. The stock currently has a Zacks Rank #5 (Strong Sell).
PTC Inc. (PTC - Free Report) is a Needham, MA-based software company engaged in developing, marketing and supporting software solutions. Over the past month, the Zacks Consensus Estimate for current quarter earnings declined from 31 cents per share to 30 cents. The stock currently has a Zacks Rank #3.
Norwell, MA-based Clean Harbors, Inc. (CLH - Free Report) is a leading provider of environmental, energy and industrial services in North America. Over the past month, the Zacks Consensus Estimate for the current quarter has remained unchanged at 6 cents per share. The stock currently has a Zacks Rank #5.
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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Dispose of These 5 Toxic Stocks or Sell Short for Gains
One of the keys to successful investing is precise identification of overhyped toxic stocks and the correctly priced ones. But it is not easy to accurately distinguish between these two types of stocks. Investors who can correctly spot the toxic stocks and get rid of them at the right time are likely to benefit at the end.
Usually, overblown toxic stocks are susceptible to external shocks and are loaded with hefty amount of debts. Also, the price of the toxic stocks is unjustifiably high. The high price of toxic stocks is only short-lived as the current bloated price of the toxic stocks is higher than its intrinsic value.
The exorbitant price of toxic stocks can be due to either an irrational exuberance associated with them or some fundamental drawbacks associated with the stock. Owning such stocks for a long stretch of time can be detrimental to investors and may result in huge erosion of wealth.
Investors may gain from the accurate identification of toxic stocks with the help of an investing strategy known as short selling. This strategy allows them 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, picking up toxic stocks and discarding them at the right time is the key to protect 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 25 toxic stocks that showed up on the screen:
Wilmington, DE-based Incyte Corporation (INCY - Free Report) is a drug discovery company. Over the past month, the Zacks Consensus Estimate for current quarter loss rose from 47 cents per share to 51 cents. Incyte carries a Zacks Rank #3. You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.
Leawood, KS-based AMC Entertainment Holdings, Inc. (AMC - Free Report) is engaged in the theatrical exhibition business. Over the past month, the Zacks Consensus Estimate for current quarter earnings declined from 34 cents per share to 32 cents. The stock currently has a Zacks Rank #3.
Buenos Aires, Argentina-based Mercadolibre, Inc. (MELI - Free Report) is a leading online trading platform in Latin America. Over the past month, the Zacks Consensus Estimate for current quarter earnings remained unchanged at 58 cents. The stock currently has a Zacks Rank #5 (Strong Sell).
PTC Inc. (PTC - Free Report) is a Needham, MA-based software company engaged in developing, marketing and supporting software solutions. Over the past month, the Zacks Consensus Estimate for current quarter earnings declined from 31 cents per share to 30 cents. The stock currently has a Zacks Rank #3.
Norwell, MA-based Clean Harbors, Inc. (CLH - Free Report) is a leading provider of environmental, energy and industrial services in North America. Over the past month, the Zacks Consensus Estimate for the current quarter has remained unchanged at 6 cents per share. The stock currently has a Zacks Rank #5.
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 »