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 how the broader market is performing, 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 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 18 toxic stocks that showed up on the screen. Each of the below-mentioned stocks carries a Zacks Rank #5 (Strong Sell).
Cameco Corporation ( CCJ Quick Quote CCJ - Free Report) : Cameco is one of the world's largest uranium producers. The company is a notable 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 60 days. 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, as well as businesses. The Zacks Consensus Estimate for the bottom line for fiscal 2021 is currently pegged at a loss of 32 cents per share, indicating year-over-year fall of 88.3%. Over the past 30 days, its fiscal 2021 estimates have deteriorated from earnings of 45 cents per share to a loss of 32 cents. New Fortress Energy ( NFE Quick Quote NFE - Free Report) : Based in New York, New Fortress is an integrated energy infrastructure company. The Zacks Consensus Estimate for its loss for the current year has widened from 9 cents to 55 cents per share over the past 30 days. Earnings estimates for the next year have declined 27.5% over the same time period. The company missed earnings estimates in each of the trailing four quarters, with the average negative surprise being 72.4%. Hexcel Corporation ( HXL Quick Quote HXL - Free Report) : Hexcel manufactures and distributes lightweight, high-performance structural materials for use in Commercial Aerospace, Space & Defense, as well as Industrial markets. The Zacks Consensus Estimate for 2020 sales and earnings suggests a year-over-year decline of 36.3% and 92.1%, respectively. The company missed earnings estimates in three of the trailing four quarters and surpassed the same once, with the average negative surprise being 144.4%.
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