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Here's Why You Should Cut Ties With These 4 Toxic Stocks

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Proper identification of rightly-priced stocks is the key to successful investing. In reality, overpriced toxic stocks and the rightly-priced stocks are intertwined in such a manner that it is difficult to distinguish between the two. Investors who know how to identify toxic stocks and get rid of those at the right time see success at the end.
 
Usually, overhyped toxic stocks are vulnerable to external shocks. These stocks are also loaded with a huge amount of debt. The price of these stocks is artificially inflated. Nonetheless, the higher price of toxic stocks is only transitory in nature as it is more than its true intrinsic value.

Investors are likely to gain from precise identification of toxic stocks with the help of an investing strategy called short selling. This strategy allows investors 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, precisely figuring out toxic stocks and discarding or short selling those at the right time is the key to safeguard your portfolio from big losses.

Screening Criteria

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 four of the 24 toxic stocks that showed up on the screen:

Red Robin Gourmet Burgers, Inc. (RRGB - Free Report) : Headquartered in Colorado, this casual dining restaurant chain has lost 25.8% of its value over the past three months. The company is bearing the brunt of escalating expenses for several quarters due to maintenance activities, and advertising and technical upgrades. It anticipates commodity inflation for the second half of 2021 amid a rise in beef costs. The debt-to-capital ratio of 0.58 also raises a concern. Although Red Robin has resumed operations at the majority of its restaurants, additional outbreaks can result in lower capacity and suspension of in-restaurant dining operations. Increasing Delta variant infections should keep investors’ expectations for this restaurant stock in check. Over the past 30 days, the Zacks Consensus Estimate for 2021 loss per share has widened from 93 cents to $1.34. The stock currently carries a Zacks Rank #4 (Sell). 

Yandex N.V. (YNDX - Free Report) : Headquartered in Russia, this search engine giant derives revenues majorly from online advertising. The company operates primarily in emerging markets wherein overall online advertising spending and Internet use penetration are comparatively lower than the developed countries. The concentration of revenues and operations is a serious concern. Intensifying competition also remains a headwind for Yandex, which currently has a Zacks Rank #5 (Strong Sell). Even if the company plans to enter the global market, it will face tough competition from Google, which already poses a stiff challenge in Russia. Yandex’s valuation looks stretched from the P/E perspective. Currently, it is trading at a P/E ratio of 81.6, higher than the industry’s 56.3. The Zacks Consensus Estimate for 2021 earnings implies a year-over-year decline of 34.6%. Over the past 30 days, the Zacks Consensus Estimate for 2021 earnings per share has been downwardly revised by 26.4%.

Hexcel Corporation (HXL - Free Report) : Delaware-based Hexcel is an aerospace composite technology company that currently holds a Zacks Rank #4. Reduction in air travel and stringent restrictions on businesses amid the COVID-19 pandemic resulted in a significant decline in demand both within Hexcel’s aerospace and industrial markets. With rising concerns about Delta variant infections, the company’s operations, cash flows and financial position are likely to be adversely impacted, at least in the near term. Industrial sales are getting impacted by weakness in the wind energy business and the sluggishness is not likely to abate anytime soon. The Zacks Consensus Estimate for 2021 earnings implies a year-over-year decline of 36%. Over the past seven days, the Zacks Consensus Estimate for 2021 earnings per share has moved south from 22 cents to 16 cents.

Enphase Energy (ENPH - Free Report) : Shares of this California-based global energy technology company have declined 18% over the past three months. The widespread shortage of semiconductor supply has been affecting the solar market and Enphase is also battling the same. Evidently, in the last reported quarter, the company experienced component constraints on supplier AC Fed drivers, which resulted in a slight sequential decline in microinverter shipment volume and drove freight costs. For the third quarter as well, the company expects to remain constrained on microinverters, which may clip overall revenues. This Zacks Rank #4 stock is trading at a premium from an EV/EBITDA perspective. The stock currently has a trailing 12-month EV/EBITDA ratio of 61.4, higher than the industry’s 38.8%. Over the past 90 days, the Zacks Consensus Estimate for 2021 earnings per share has been downwardly revised by 7.7%.

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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