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These 5 Toxic Stocks Could Hurt Your Portfolio

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Investing success hinges upon precise identification of overpriced stocks and fairly priced ones. However, the over-hyped toxic stocks and the correctly priced stocks are mingled in the marketplace in such a way that it becomes very tough to differentiate between them. Investors who can pinpoint the toxic stocks and discard them at the right time are likely to gain.

Generally, toxic stocks are vulnerable to external shocks and are loaded with high levels of debt. Also, price of the toxic stocks is irrationally high. Unjustifiably high price of the toxic stocks is only short lived as the intrinsic value of these stocks is lower than the current bloated price.

Inflated price of the toxic stocks can be ascribed to either an irrational exuberance associated with them or some serious fundamental lacunae in the stock. If you own such stocks for a long period of time, you are likely to witness huge erosion in your wealth.

Conversely, if you can figure out the toxic stocks correctly, 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, picking up toxic stocks and abandoning them at the right time is the key to protect your portfolio from big losses. Profits can be made 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 five of the 31 toxic stocks that showed up on the screen.

MercadoLibre, Inc. (MELI - Free Report) : Buenos Aires, Argentina-based MercadoLibre is one of the largest e-commerce platforms in Latin America. The Zacks Consensus Estimate for earnings for the current year has been revised downward by 37 cents over the past 30 days. The stock carries a Zacks Rank #5 (Strong Sell) and has a VGM Scoreof C.

Aphria Inc. : Headquartered in Leamington, Aphria produces, supplies and sells medical cannabis, primarily in Canada. The Zacks Consensus Estimate for the bottom line for fiscal 2021 is pegged at a loss of 22 cents a share, which has widened by a penny over the past seven days. The stock carries a Zacks Rank #5 and has a VGM Score of F.

New Fortress Energy LLC (NFE - Free Report) : Based in New York, the company operates as an integrated gas-to-power company. The Zacks Consensus Estimate for 2021 earnings has been revised downward by 29 cents over the past 30 days. The stock carries a Zacks Rank #5 and has a VGM Score of F.

The Howard Hughes Corporation (HHC - Free Report) : The company owns, manages and develops commercial, residential, along with mixed-use properties throughout the United States. The Zacks Consensus Estimate for the bottom line for the current year is pegged at a loss of 47 cents a share. The consensus estimate has deteriorated from earnings of $2.51 a share over the past 60 days. The stock carries a Zacks Rank #4 (Sell) and has a VGM Score of F.

InterDigital, Inc. (IDCC - Free Report) : Headquartered in Wilmington, DE, InterDigital is a pioneer in advanced mobile technologies that enable wireless communications and capabilities. The Zacks Consensus Estimate for earnings for 2021 has been revised downward by 26 cents over the past seven days. The earnings estimate implies a year-over-year decline of 60%. The stock carries a Zacks Rank #4 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