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4 Toxic Stocks to Abandon or Sell Short for Solid Gains

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Accurate identification of rightly-priced stocks is the key to successful investing. However, in practice, overpriced toxic stocks and the correctly-priced stocks are intermixed in such a way that it is tough to distinguish between the two.

Generally overpriced toxic stocks are susceptible to external shocks. Moreover, these stocks are burdened with a large amount of debt. The price of these stocks is artificially inflated. The higher price of toxic stocks is only short-lived in nature as it is higher than its intrinsic value.

Investors are likely to benefit from accurate identification of toxic stocks with the help of an investing strategy called short selling. This strategy allows investors to sell a stock first and then buy it when price falls.

While short selling excels in bear markets, it typically loses money in bull markets.

So, accurately identifying toxic stocks and abandoning or short selling those at the right time is the key to protect your portfolio from big losses.

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 0: 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 four 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 United States and Canada. In the past 30 days, the Zacks Consensus Estimate for current-year earnings per share has declined from 5 cents to 3 cents.  At present, the company has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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. In the past 30 days, the Zacks Consensus Estimate for current-year earnings per share has remained unchanged at 70 cents.  The company has a Zacks Rank #3.

Wilmington, DE-based Incyte Corporation (INCY - Free Report) is a drug discovery company. Over the past seven days, the Zacks Consensus Estimate for current-year earnings per share has remained unchanged at $2.11. The stock currently has a Zacks Rank #3.

Leawood, KS-based AMC Entertainment Holdings, Inc. (AMC - Free Report) operates as a theatrical exhibition company primarily in the United States. Over the past 30 days, the Zacks Consensus Estimate for current-quarter earnings has declined from 32 cents to 26 cents. The stock currently has 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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