Investing success depends upon proper identification of overhyped toxic stocks and the correctly priced ones. However, spotting toxic stocks on time and discarding them to make profit is not an easy task.
Overpriced toxic stocks are generally susceptible to external shocks. Additionally, these stocks are loaded with huge debts. The price of the toxic stocks is artificially inflated. However, the higher price of toxic stocks is only short term in nature as it exceeds its true intrinsic value.
Investors may make profit from proper identification of toxic stocks with the help of an investing strategy called short selling. This strategy permits investors 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 abandoning or short selling them at the right time is the key to shield your portfolio from big losses.
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 16 toxic stocks that showed up on the screen:
StoneCo Ltd. ( STNE Quick Quote STNE - Free Report) : This Brazil-based financial technology solutions provider currently carries a Zacks Rank #4 (Sell). The Zacks Consensus Estimate for 2020 sales and earnings suggests a year-over-year decline of 12% and 24.3%, respectively. Over the trailing four quarters, the company missed earnings estimates on three occasions and topped once, with an average negative surprise of 9.8% Las Vegas Sands Corp. ( LVS Quick Quote LVS - Free Report) : Headquartered in Las Vegas, this Zacks Rank #4 firm owns and operates casino resorts and convention centers. The Zacks Consensus Estimate for 2020 sales and earnings suggests a year-over-year decline of 72.4% and 162.3%, respectively. Yandex N.V. ( YNDX Quick Quote YNDX - Free Report) : This Zacks Rank #4 company is the biggest search engine in Russia. The Zacks Consensus Estimate for 2020 earnings suggests a year-over-year decline of 30.7%. Over the past 30 days, its 2020 earnings estimates have declined by 5 cents a share. Illumina Inc. ( ILMN Quick Quote ILMN - Free Report) : This Zacks Rank #4 company is a life sciences company that provides tools and integrated systems for analysis of genetic variation and function. The Zacks Consensus Estimate for 2020 sales and earnings suggests a year-over-year decline of 12.7% and 33.6%, respectively. Over the past 30 days, its 2020 earnings estimates have declined by 3 cents a share.
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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.
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