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Avoid Exposure to These Toxic Stocks to Prevent Losses
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Not all stocks that recently scaled lofty heights will be able to sustain their good show. In fact, some of these stocks — whose current value surpassed their actual potential — are bound to result in loss for investors over time.
No matter how the broader market is performing, stocks without sturdy fundamentals are toxic for your portfolio. Identifying such bloated stocks accurately and dumping them at the right time can protect your returns.
Overpricing of these toxic stocks can be ascribed to either an irrational exuberance associated with them or some serious fundamental drawbacks. And if you own such stocks for a long period of time, you are likely to see significant erosion of your wealth.
However, if you can rightly figure out such 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 buy it when the price falls.
While short selling excels in bear markets, it typically loses money in bull markets.
So, just like picking promising stocks, detecting toxic stocks and discarding them at the right time is crucial to shielding one’s portfolio from big 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 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 0: Negative EPS estimate revision for the current and next fiscal year during the past 12 weeks points to analysts’ pessimism.
Here are four of the 27 stocks that made it through the screen:
JD.com, Inc. (JD - Free Report) operates as an e-commerce company and retail infrastructure service provider. The Zacks Consensus Estimate for its earnings for the current year has been revised downward from $1.60 per share to $1.53 over the past 30 days. The stock currently carries a Zacks Rank #5 (Strong Sell) and has a VGM Score of D.
Autodesk, Inc. (ADSK - Free Report) provides 3D design, engineering, and entertainment software and services. The Zacks Consensus Estimate for its earnings for the current year has been revised downward from $4.97 per share to $4.88 over the past 30 days. The stock currently carries a Zacks Rank #5 and has a VGM Score of C.
Shift4 Payments (FOUR - Free Report) is a provider of integrated payment processing and technology solutions. The Zacks Consensus Estimate for its earnings for the current year has been revised downward from 50 cents per share to 44 cents over the past 60 days. The stock currently carries a Zacks Rank #5 and has a VGM Score of D.
Chindata Group Holdings provides carrier-neutral hyperscale data center solution. Over the past 30 days, the Zacks Consensus Estimate for its earnings for the current year has been revised downward from 4 cents per ADR to 3 cents, indicating a year-over-year decline of 66.7%. The stock currently carries a Zacks Rank #4 (Sell) and has a VGM Score of D.
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.
The Research Wizard is a great place to begin. It's easy to use. Everything is in plain language. And it's very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.
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.
Image: Shutterstock
Avoid Exposure to These Toxic Stocks to Prevent Losses
Not all stocks that recently scaled lofty heights will be able to sustain their good show. In fact, some of these stocks — whose current value surpassed their actual potential — are bound to result in loss for investors over time.
No matter how the broader market is performing, stocks without sturdy fundamentals are toxic for your portfolio. Identifying such bloated stocks accurately and dumping them at the right time can protect your returns.
Overpricing of these toxic stocks can be ascribed to either an irrational exuberance associated with them or some serious fundamental drawbacks. And if you own such stocks for a long period of time, you are likely to see significant erosion of your wealth.
However, if you can rightly figure out such 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 buy it when the price falls.
While short selling excels in bear markets, it typically loses money in bull markets.
So, just like picking promising stocks, detecting toxic stocks and discarding them at the right time is crucial to shielding one’s portfolio from big 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 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 0: Negative EPS estimate revision for the current and 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 four of the 27 stocks that made it through the screen:
JD.com, Inc. (JD - Free Report) operates as an e-commerce company and retail infrastructure service provider. The Zacks Consensus Estimate for its earnings for the current year has been revised downward from $1.60 per share to $1.53 over the past 30 days. The stock currently carries a Zacks Rank #5 (Strong Sell) and has a VGM Score of D.
Autodesk, Inc. (ADSK - Free Report) provides 3D design, engineering, and entertainment software and services. The Zacks Consensus Estimate for its earnings for the current year has been revised downward from $4.97 per share to $4.88 over the past 30 days. The stock currently carries a Zacks Rank #5 and has a VGM Score of C.
Shift4 Payments (FOUR - Free Report) is a provider of integrated payment processing and technology solutions. The Zacks Consensus Estimate for its earnings for the current year has been revised downward from 50 cents per share to 44 cents over the past 60 days. The stock currently carries a Zacks Rank #5 and has a VGM Score of D.
Chindata Group Holdings provides carrier-neutral hyperscale data center solution. Over the past 30 days, the Zacks Consensus Estimate for its earnings for the current year has been revised downward from 4 cents per ADR to 3 cents, indicating a year-over-year decline of 66.7%. The stock currently carries a Zacks Rank #4 (Sell) and has a VGM Score of D.
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.
The Research Wizard is a great place to begin. It's easy to use. Everything is in plain language. And it's very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.
Click here to sign up for a free trial to the Research Wizard today.
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 at: https://www.zacks.com/performance