Investing in a stock whose current valuation exceeds its true inherent potential is bound to result in loss over time. Spotting such toxic stocks accurately on a regular basis and dumping them at the right time is a major key to a winning investing strategy.
Overpricing of these toxic stocks can be ascribed to irrational exuberance associated with them. 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. If you own such stocks for an unreasonable period, they could end up significantly eroding your wealth. However, if you can detect 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 purchase it when its price falls. Naturally, short selling excels in bear markets, while it typically loses money in bull markets. So, just like picking up promising stocks, identifying toxic stocks and dumping them at the right time is crucial to guarding one’s portfolio from massive 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 17 toxic stocks that showed up on the screen.
Hexcel Corporation ( HXL Quick Quote HXL - Free Report) : This Zacks Rank #4 (Sell) company 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 2021 sales and earnings suggests a year-over-year decline of 10.4% and 16%, respectively. The consensus mark for 2021 earnings per share has moved south by 31 cents over the past seven days. The firm has a VGM Score of C. 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 24 cents per share, indicating a year-over-year deterioration of 41.2%. The company currently carries a Zacks Rank #5 (Strong Sell) and has a Value Score of C. TAL Education Group ( TAL Quick Quote TAL - Free Report) : Based in Beijing, the company provides tutoring services to K-12 students in the People's Republic of China. The company currently carries a Zacks Rank #5 and has a VGM Score of D. The Zacks Consensus Estimate for fiscal 2021 earnings has been revised downward from 59 cents a share to 33 cents over the past 30 days. The consensus mark for fiscal 2022 earnings has also been revised 14.4% downward over the same time frame. Arcturus Therapeutics Holdings Inc. ( ARCT Quick Quote ARCT - Free Report) : Based in San Diego, CA, this Zacks Rank #4 company is a preclinical-stage biopharmaceutical firm. The Zacks Consensus Estimate for fiscal 2021 loss has been widened from 7 cents per share to 42 cents over the past 30 days. The company, which carries a VGM Score of F, has missed earnings estimates in each of the trailing four quarters.
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