Distinguishing between overpriced and fairly priced stocks is the key to successful investing. But the task is not easy as the correctly priced and overvalued stocks are mingled in a very deceptive way in the marketplace. However, investors who can pinpoint the overhyped toxic stocks and discard them at the right time are the ones who are poised to benefit.
Usually, toxic companies are vulnerable to external shocks. These companies are burdened with huge debts too. Also, unjustifiably high price of the toxic stocks is short lived as their current price exceeds their inherent value. Quite naturally, these stocks are bound to result in loss for investors over time.
Higher price of the toxic stocks can be attributed to either an irrational exuberance associated with them or some serious fundamental lacuna. If you own such stocks for long, you are likely to see a big loss in your wealth.
If you can, however, precisely spot 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 figuring out stocks with growth potential, identifying toxic stocks and discarding them at the right time is the key to shield 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 fiscal year and the next 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 22 toxic stocks that showed up on the screen:
Manchester United Ltd. ( MANU Quick Quote MANU - Free Report) : Manchester United owns and operates a professional sports team. Over the past 30 days, the Zacks Consensus Estimate for fiscal 2021 has deteriorated from earnings of a penny to loss of 31 cents a share. The bottom-line projection indicates a year-over-year plunge of 210%. The company currently has a Zacks Rank #5 (Strong Sell). NovoCure Limited ( NVCR Quick Quote NVCR - Free Report) : This oncology company operates primarily in the United States, Germany, Switzerland and Japan. Over the past 60 days, the Zacks Consensus Estimate for 2021 earnings has moved south from 17 cents to 8 cents a share. The bottom-line estimate implies a 55.6% decline from the year-ago level. The company presently has a Zacks Rank #5. Palantir Technologies Inc. ( PLTR Quick Quote PLTR - Free Report) : The company builds and deploys software platforms for the intelligence community, principally in the United States. Over the past 60 days, the Zacks Consensus Estimate for 2021 earnings has moved south from 18 cents to 14 cents a share. The bottom-line estimate indicates a year-over-year decline of 26.3%. The company currently has a Zacks Rank #4 (Sell). JD.com, Inc. ( JD Quick Quote JD - Free Report) : JD.com operates as an online direct sales company in China. Over the past 60 days, the Zacks Consensus Estimate for 2021 earnings has moved south from $1.69 a share to $1.53. The bottom-line projection indicates a year-over-year decline of 5.6%. The company has a Zacks Rank #4 at present.
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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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