Just like selecting good and undervalued stocks on a regular basis is one of the keys to investing success, identifying and proactively getting rid of toxic stocks is also crucial to maximizing portfolio returns.
A toxic stock is basically one that trades at a price not supported by its fundamental strength. Moreover, these stocks generally have a high level of debt. The price of these stocks is artificially inflated. Irrational exuberance associated with a stock may lead to overpricing. Owning such stocks for an inordinate period could lead to erosion of wealth for an investor.
However, if you can correctly identify the toxic stocks, you may also gain by resorting to an investment technique called short selling. In short selling, one can sell an un-owned stock and then purchase it when the price falls. Naturally, short selling has excelled in bear markets, while it typically loses money in bull markets.
As such, identifying toxic stocks is also imperative in shielding one’s portfolio from massive losses or making profits by short selling them.
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 over 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. Each of the below-mentioned stocks carry a Zacks Rank #5 (Strong Sell).
Aramark Holding ( ARMK Quick Quote ARMK - Free Report) : Philadelphia-based Aramark offers food services, facilities management, uniform and career apparel to health care institutions, universities, school districts, stadiums, andbusinesses. The Zacks Consensus Estimate for the bottom line for fiscal 2021 is currentlypegged ata loss of 32 cents per share. Over the past 30 days, its fiscal 2021 estimates have deteriorated from earnings of 45 cents a share to a loss of 32 cents. Alteryx, Inc. ( AYX Quick Quote AYX - Free Report) :Headquartered in California, Alteryx provides self-service data analytics software platform.The Zacks Consensus estimate for 2020 earnings suggests a year-over-year decline of 34%.The consensus mark for 2021 earnings per share has moved south by 4 cents over the past 30 days. Varex Imaging Corporation ( VREX Quick Quote VREX - Free Report) : Headquartered in Salt Lake City, Varex Imaging is an innovator, designer and manufacturer of X-ray imaging component. The Zacks Consensus Estimate for fiscal 2021 earnings has declined by 19 cents a share over a period of 30 days. The consensus mark for fiscal 2022 earnings per share has also narrowed by 9 cents over the same time period. Cameco Corporation ( CCJ Quick Quote CCJ - Free Report) : Cameco is one of the world's largest uranium producers. The company is a significant supplier of conversion services and one of two CANDU fuel manufacturers in Canada. The Zacks Consensus estimate for 2020 sales and earnings suggests a year-over-year decline of 7% and 312.5%, respectively. The consensus mark for 2021 earnings per share has moved south by 14 cents over the past 30 days.
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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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