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Keep These 4 Toxic Stocks Away From Your Portfolio

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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 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 either due to 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 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 19 toxic stocks that showed up on the screen.

Anika Therapeutics, Inc. (ANIK - Free Report) ): Based in Massachusetts, Anika operates as an integrated joint preservation, restoration and regenerative solutions company. The Zacks Consensus Estimate for 2021 loss per share has widened more than 126% over the past 60 days. The firm currently carries a Zacks Rank #5 (Strong Sell) and has a VGM Score of D.

Laureate Education Inc. (LAUR - Free Report) ): Headquartered in Maryland, Laureate — which presently carries a Zacks Rank #4 (Sell) — provides higher education programs and services to students through a network of universities, as well as higher education institutions. The Zacks Consensus Estimate for 2021 sales signals a 37.8% decline year on year. The consensus mark for 2021 loss has widened more than 765% over the past 60 days.

Nuance Communications, Inc. (NUAN - Free Report) ): Domiciled in Massachusetts, Nuance provides conversational and cognitive artificial intelligence innovations. The consensus mark for 2021 earnings per share has moved 13% south over the past 60 days. The firm carries a Zacks Rank #5 and has a VGM Score of D, at present.

Varex Imaging Corporation (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 and 2022 earnings per share has declined 47.5% and 13.6%, respectively, over a period of 30 days. The firm presently carries a Zacks Rank #5 and has a VGM Score of D.

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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 athttps://www.zacks.com/performance