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Not all stocks that recently scaled lofty heights will be able to sustain their good show. In fact, some of these stocks — whose current value surpassed their actual potential — are bound to result in loss for investors over time.
No matter what the broader market is doing, stocks without sturdy fundamentals are toxic for your portfolio. Identifying such bloated stocks accurately and dumping them at the right time can protect your returns.
Overpricing of these toxic stocks can be ascribed to either an irrational exuberance associated with them or some serious fundamental drawbacks. And if you own such stocks for a long period of time, you are likely to see significant erosion of your wealth.
However, if you can rightly figure out such toxic stocks, you may gain in a bear market by resorting to an investing strategy called short selling. This strategy allows one 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 promising stocks, detecting toxic stocks and discarding them at the right time is crucial to shielding one’s portfolio from big losses or making 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.
Here are five of the 16 toxic stocks that showed up on the screen:
Vail Resorts, Inc. (MTN - Free Report) : This Colorado-based ski resort operator currently carries a Zacks Rank #5 (Strong Sell). The Zacks Consensus Estimate for fiscal 2021 earnings suggests a year-over-year decline of 75.8%. Over the past 30 days, its fiscal 2021 earnings estimates have declined 84%.
Rite Aid Corporation : Headquartered in Pennsylvania, Rite Aid is one of the leading drugstore chains in the United States. The company currently carries a Zack Rank #4 (Sell). The Zacks Consensus Estimate for the bottom line for fiscal 2021 is currently pegged at a loss of 7 cents per share.
Aramark Holding (ARMK - Free Report) : Philadelphia-based Aramark — currently carrying a Zacks Rank #4 — offers food services, facilities management, uniform and career apparel to health care institutions, universities, school districts, stadiums, as well as businesses. The Zacks Consensus Estimate for the bottom line for fiscal 2020 is currently a loss of 11 cents per share. Over the past 30 days, its fiscal 2020 loss estimates have widened by 5 cents a share.
Allegiant Travel (ALGT - Free Report) :This Zacks Rank #4 leisure travel company offers flight transport, hotel booking, car rentals, travel management and other related services. The Zacks Consensus Estimate for the bottom line for fiscal 2020 currently stands at a loss of $10.77 per share. Over the past 30 days, its fiscal 2020 loss per share estimates have widened by 10.9%.
Bitauto Holdings Limited : This Zacks Rank #5 company is engaged in providing Internet content and marketing services for the automotive industry in China. The Zacks Consensus Estimate for the bottom line for fiscal 2020 is currently pegged at a loss of 49 cents per share. Over the past 60 days, its fiscal 2020 loss estimates have widened by 69.5%.
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.
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.
Image: Bigstock
5 Toxic Stocks That You Should Not be Owning
Not all stocks that recently scaled lofty heights will be able to sustain their good show. In fact, some of these stocks — whose current value surpassed their actual potential — are bound to result in loss for investors over time.
No matter what the broader market is doing, stocks without sturdy fundamentals are toxic for your portfolio. Identifying such bloated stocks accurately and dumping them at the right time can protect your returns.
Overpricing of these toxic stocks can be ascribed to either an irrational exuberance associated with them or some serious fundamental drawbacks. And if you own such stocks for a long period of time, you are likely to see significant erosion of your wealth.
However, if you can rightly figure out such toxic stocks, you may gain in a bear market by resorting to an investing strategy called short selling. This strategy allows one 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 promising stocks, detecting toxic stocks and discarding them at the right time is crucial to shielding one’s portfolio from big losses or making 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 five of the 16 toxic stocks that showed up on the screen:
Vail Resorts, Inc. (MTN - Free Report) : This Colorado-based ski resort operator currently carries a Zacks Rank #5 (Strong Sell). The Zacks Consensus Estimate for fiscal 2021 earnings suggests a year-over-year decline of 75.8%. Over the past 30 days, its fiscal 2021 earnings estimates have declined 84%.
Rite Aid Corporation : Headquartered in Pennsylvania, Rite Aid is one of the leading drugstore chains in the United States. The company currently carries a Zack Rank #4 (Sell). The Zacks Consensus Estimate for the bottom line for fiscal 2021 is currently pegged at a loss of 7 cents per share.
Aramark Holding (ARMK - Free Report) : Philadelphia-based Aramark — currently carrying a Zacks Rank #4 — offers food services, facilities management, uniform and career apparel to health care institutions, universities, school districts, stadiums, as well as businesses. The Zacks Consensus Estimate for the bottom line for fiscal 2020 is currently a loss of 11 cents per share. Over the past 30 days, its fiscal 2020 loss estimates have widened by 5 cents a share.
Allegiant Travel (ALGT - Free Report) :This Zacks Rank #4 leisure travel company offers flight transport, hotel booking, car rentals, travel management and other related services. The Zacks Consensus Estimate for the bottom line for fiscal 2020 currently stands at a loss of $10.77 per share. Over the past 30 days, its fiscal 2020 loss per share estimates have widened by 10.9%.
Bitauto Holdings Limited : This Zacks Rank #5 company is engaged in providing Internet content and marketing services for the automotive industry in China. The Zacks Consensus Estimate for the bottom line for fiscal 2020 is currently pegged at a loss of 49 cents per share. Over the past 60 days, its fiscal 2020 loss estimates have widened by 69.5%.
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.
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