There are always some stocks that illusively scale lofty heights in a given time period. Yet, the good show doesn’t last for these overblown toxic stocks, as their current price is not justified by their fundamental strength.
Toxic companies are usually characterized by huge debt loads and are vulnerable to external shocks. Accurately identifying such bloated stocks and getting rid of them at the right time can protect your portfolio.
Overpricing of these toxic stocks can be attributed to either an irrational enthusiasm surrounding them or some serious fundamental drawbacks. If you own such bubble stocks for an inordinate period of time, you are bound to see massive erosion of wealth.
Nonetheless, if you can precisely spot such toxic stocks, you may gain 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 identifying stocks with growth potential, pinpointing toxic stocks and offloading them at the right time is crucial to guard one’s 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 26 toxic stocks that showed up on the screen:
NeoGames S.A. ( NGMS Quick Quote NGMS - Free Report) : Luxembourg-based NeoGamesis a technology-driven provider of end-to-end iLottery solutions for national and state-regulated lotteries. The Zacks Consensus Estimate for earnings for the current year has been revised down by 9 cents a share over the past 30 days. The stock currently carries a Zacks Rank #4 (Sell) and has a VGM Score of C. Red Robin Gourmet Burgers, Inc. ( RRGB Quick Quote RRGB - Free Report) : This Colorado-based firm is a full-service casual dining restaurant chain that serves an assorted range of burgers. Over the past 30 days, the Zacks Consensus Estimate for 2021 loss has widened from 12 cents per share to 93 cents. The stock currently carries a Zacks Rank #4. Hexcel Corporation ( HXL Quick Quote HXL - Free Report) : Delaware-based Hexcel develops, manufactures and distributes lightweight, high-performance structural materials for use in Commercial Aerospace, Space & Defense as well as Industrial markets. The consensus mark for sales and earnings for the current year implies a year-over-year decline of 10.5% and 12%, respectively. The company currently has a Zacks Rank #4 and a VGM Score of C. SunPower Corporation ( SPWR Quick Quote SPWR - Free Report) : This San Jose-based company manufactures and sells high-performance solar electric power technology products, systems and services worldwide to residential, commercial as well as utility-scale power plant customers. The Zacks Consensus Estimate for 2021 earnings has been revised down by 6 cents a share over the past 30 days. The stock currently carries a Zacks Rank #4.
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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.
Performance information for Zacks’ portfolios and strategies are available at: . https://www.zacks.com/performance