Accuracy in distinguishing overhyped stocks from the fairly priced ones leads to profitable investing. In a complicated marketplace, overpriced stocks and the correctly priced ones are intermixed in such a way that differentiating between the two is a tough task. Nonetheless, figuring out bloated toxic stocks on a consistent basis and discarding them at the right time is the key to successful investing.
Usually, toxic companies are characterized by a high debt burden and are vulnerable to external shocks. The hype associated with the irrationally high-priced toxic stocks is usually short-lived as their intrinsic value falls short of their current price. These toxic stocks are sure to result in loss for investors over time. Elevated price levels of these stocks can be due to either an irrational exuberance associated with them or some serious fundamental lacunae. If you own such overhyped stocks for a long period of time, you are bound to see a huge loss of wealth. However, if you can correctly pick such 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 picking stocks with huge growth potential, figuring out toxic stocks and abandoning 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 identify overpriced toxic stocks:
Most recent Debt/Equity Ratio greater than the median industry average: High debt/equity ratio implies increased 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 fiscal year and the next 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. You can see . the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here
Here are four of the 17 toxic stocks that showed up on the screen:
Proto Labs, Inc. ( PRLB Quick Quote PRLB - Free Report) : This Minnesota-based firm is low volume manufacturer of custom parts for prototyping and short-run production. The Zacks Consensus Estimate for 2020 earnings suggests a year-over-year decline of 20.8%. The firm currently carries a Zacks Rank #5 (Strong Sell). Stoneridge, Inc. ( SRI Quick Quote SRI - Free Report) : Michigan-based Stoneridge designs and manufactures engineered electrical and electronic components, modules, as well as systems. Over the past 60 days, its fiscal 2020 loss estimates have widened by 16 cents a share. The company currently carries a Zacks Rank #5. Illumina Inc. ( ILMN Quick Quote ILMN - Free Report) : San Diego, CA-based Illumina is a life sciences company, which provides tools and integrated systems for analysis of genetic variation and function. The Zacks Consensus Estimate for 2020 earnings suggests a year-over-year decline of 33.2%. The firm carries a Zacks Rank #5 at present. Cushman & Wakefield plc ( CWK Quick Quote CWK - Free Report) : This Chicago-based real estate services firm acquires and develops commercial properties, as well as provides property leasing, facilities management, tenant representation and valuation services. The Zacks Consensus Estimate for 2020 earnings suggests a year-over-year decline of 50.6%. The firm presently carries 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 back-testing 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
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.
Performance information for Zacks’ portfolios and strategies are available at: https://www.zacks.com/performance