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 25 toxic stocks that showed up on the screen:
Stoneridge, Inc. ( SRI Quick Quote SRI - Free Report) : Michigan-based Stoneridge designs and manufactures engineered electrical and electronic components, modules as well as systems. Over the past seven days, its 2021 bottom-line projection has deteriorated from earnings of 3 cents per share to a loss of 42 cents. The company currently carries a Zacks Rank #5 (Strong Sell) and has a VGM Score of D. Illumina Inc. ( ILMN Quick Quote ILMN - Free Report) : San Diego, CA-based Illumina is a life sciences company that provides tools, and integrated systems for the analysis of genetic variation and function. The Zacks Consensus Estimate for 2021 earnings per share has moved south by 5 cents over the past seven days. The firm carries a Zacks Rank #5 and a VGM Score of C at present. TPI Composites, Inc. ( TPIC Quick Quote TPIC - Free Report) : Headquartered in Arizona, the firm is the manufacturer of composite wind blades for the wind energy market. Over the past 60 days, the Zacks Consensus Estimate for 2021 loss per share has widened by 13 cents to $1.41. The bottom-line projection indicates a year-over-year plunge of 161%. TPI Composites currently carries a Zacks Rank #5 and has a VGM Score of F. JD.com, Inc. ( JD Quick Quote JD - Free Report) : This Beijing-based firm operates as an online direct sales company in China. The Zacks Consensus Estimate for 2021 earnings per share has been revised downward by 3 cents over the past 30 days, implying a year-over-year decline of 12.4%. The stock currently carries a Zacks Rank #5.
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.
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