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Keep Your Portfolio Protected From These Toxic Stocks

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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 22 toxic stocks that showed up on the screen.

DexCom, Inc. (DXCM - Free Report) : San Diego-based DexCom is a medical device company focused on the design, development and commercialization of continuous glucose monitoring systems. The stock presently carries a Zacks Rank #5 (Strong Sell) and has a VGM Score of D. The Zacks Consensus Estimate for 2021 earnings suggests a year-over-year decline of 27%. Over the past seven days, the Zacks Consensus Estimate for 2021 earnings per share has been downwardly revised by 15 cents.

Casella Waste Systems (CWST - Free Report) : This Vermont-based provider of vertically integrated solid waste services currently carries a Zacks Rank #5 and has a VGM Score of D. The Zacks Consensus Estimate for 2021 earnings suggests a year-over-year decline of 2.4%. Over the past seven days, the Zacks Consensus Estimate for 2021 earnings has declined 9 cents per share.

Ceridian HCM Holding Inc. (CDAY - Free Report) : Based in Minneapolis, Ceridian HCM operates as a human capital management software company. The stock presently carries a Zacks Rank #4 (Sell) and has a Value Score of F. The Zacks Consensus Estimate for 2021 earnings suggests a year-over-year decline of 12%. Over the past 30 days, the Zacks Consensus Estimate for 2021 earnings per share has been downwardly revised by 12 cents.

Hexcel Corporation (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 company currently carries a Zacks Rank #4 and has a Value Score of C. The Zacks Consensus Estimate for 2021 earnings suggests a year-over-year decline of 16%. The consensus mark for 2021 earnings per share has moved 38 cents south over the past 60 days.

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.

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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