Making a proper distinction between fairly priced stocks and overpriced ones is the key to investing success. However, the correctly priced and overhyped toxic stocks are mingled in such a way in the marketplace that it is not easy to separate them. Investors who can figure out the overpriced stocks and dump them at the right time are the ones likely to make a profit.
In general, toxic stocks are burdened with huge debt loads and vulnerable to external shocks. Moreover, irrationally higher price of the toxic stocks are short-lived as the inherent value of these stocks is lower than their current price. Quite justifiably, if you own such toxic stocks for an inordinate period of time, you are sure to see huge erosion in your wealth.
Higher price of the toxic stocks can be ascribed to either an irrational exuberance associated with them or some serious fundamental drawbacks. If you own such stocks for long, you are likely to see a big loss in your wealth.
If you can, however, precisely pinpoint the 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 identifying stocks with growth potential, spotting toxic stocks and dumping them at the right time is the key to safeguard your portfolio from big losses or make profits by short selling them.
Here is a winning strategy that will help you to identify overpriced toxic stocks:
Most recent Debt/Equity Ratio greater than the median industry average: High debt/equity ratio implies high 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 and the next fiscal year during 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 29 toxic stocks that showed up on the screen:
MercadoLibre, Inc. ( MELI Quick Quote 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 42.6% to $2.06 per share over the past 60 days. The stock presently carries a Zacks Rank #5 (Strong Sell) and has a VGM Score of C. HealthEquity, Inc. ( HQY Quick Quote HQY - Free Report) : Headquartered in Draper, HealthEquity provides technology-enabled services platforms that allow consumers to make healthcare decisions. The stock currently carries a Zacks Rank #5 and has a VGM Score of D. The Zacks Consensus Estimate for fiscal 2022 earnings has been revised downward by 30 cents to $1.40 per share over the past 60 days and implies more than 16% decline year over year. DexCom, Inc. ( DXCM Quick Quote 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 and has a VGM Score of D. The Zacks Consensus Estimate for 2021 earnings has been revised downward by 22 cents to $2.26 per share over the past 60 days and implies more than 27% decline year over year. StoneCo Ltd. ( STNE Quick Quote STNE - Free Report) : Brazil-based StoneCo provides financial technology solutions to clients and integrated partners for conducting electronic commerce across in-store, online as well as mobile channels. The stock carries a Zacks Rank #5 and has a VGM Score of F, at present. The Zacks Consensus Estimate for 2021 earnings has been revised downward by 8.3% to 88 cents a share over the past 30 days. Las Vegas Sands Corp. ( LVS Quick Quote LVS - Free Report) : Based in Las Vegas, Las Vegas Sands is a leading international developer of multi-use integrated resorts, primarily operating in the United States and Asia. The stock currently carries a Zacks Rank #4 (Sell) and has a VGM Score of D. The Zacks Consensus Estimate for 2021 earnings has been revised downward by 92.8% to 2 cents a share over the past seven days.
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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.
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