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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. Sendas Distribuidora (ASAI - Free Report) , Switch, Inc. , Custom Truck One Source (CTOS - Free Report) and Hawaiian Holdings (HA - Free Report) are few such toxic stocks.
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 fiscal year and the next during the past 12 weeks points to analysts’ pessimism.
Here are four of the 27 toxic stocks that showed up on the screen:
Sendas Distribuidora: Based in Brazil, Sendas Distribuidora is engaged in the retail and wholesale of food as well as other products through its stores. ASAI currently carries a Zacks Rank #4 (Sell).
The Zacks Consensus Estimate for Sendas Distribuidora’s 2022 bottom line implies a year-over-year decline of 20%. The consensus mark for 2022 earnings has been revised downward by a penny to 12 cents per share over the past seven days.
Switch: Headquartered in Las Vegas, Switch is a technology infrastructure company engaged in designing and operating hyperscale data centers. SWCH currently carries a Zacks Rank #4 and has a VGM Score of D.
The Zacks Consensus Estimate for Switch’s earnings for the current year has moved south by 2 cents per share over the past 30 days. The consensus mark for earnings for the next year has also declined 2 cents over the past 30 days.
Custom Truck: Kansas City-based Custom Truck is a provider of specialized truck and heavy equipment solutions to utility, telecommunications, rail and infrastructure markets, principally in North America. CTOS currently carries a Zacks Rank #4.
The Zacks Consensus Estimate for Custom Truck’s 2021 bottom line implies a year-over-year decline of 15.4%. The consensus mark for 2021 loss per share has widened from 86 cents to $1.05 over the past seven days. Earnings estimates for 2022 have declined by 4 cents a share over the same time frame.
Hawaiian Holdings: Hawaiian Holdings, the parent of Hawaiian Airlines, is headquartered in Honolulu County. In fact, it is Hawaii's biggest airline and has been serving the islands for more than 85 years. HA currently carries a Zacks Rank #4 and a VGM Score of C.
The Zacks Consensus Estimate for Hawaiian Holdings’ 2021 loss per share has widened from $7.33 to $8.18 over the past 60 days. The consensus mark for earnings for the next year has been downwardly revised from $1.09 per share to 66 cents over the same time frame.
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 backtesting 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: Bigstock
Say No to These 4 Toxic Stocks
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. Sendas Distribuidora (ASAI - Free Report) , Switch, Inc. , Custom Truck One Source (CTOS - Free Report) and Hawaiian Holdings (HA - Free Report) are few such toxic stocks.
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 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 27 toxic stocks that showed up on the screen:
Sendas Distribuidora: Based in Brazil, Sendas Distribuidora is engaged in the retail and wholesale of food as well as other products through its stores. ASAI currently carries a Zacks Rank #4 (Sell).
The Zacks Consensus Estimate for Sendas Distribuidora’s 2022 bottom line implies a year-over-year decline of 20%. The consensus mark for 2022 earnings has been revised downward by a penny to 12 cents per share over the past seven days.
Switch: Headquartered in Las Vegas, Switch is a technology infrastructure company engaged in designing and operating hyperscale data centers. SWCH currently carries a Zacks Rank #4 and has a VGM Score of D.
The Zacks Consensus Estimate for Switch’s earnings for the current year has moved south by 2 cents per share over the past 30 days. The consensus mark for earnings for the next year has also declined 2 cents over the past 30 days.
Custom Truck: Kansas City-based Custom Truck is a provider of specialized truck and heavy equipment solutions to utility, telecommunications, rail and infrastructure markets, principally in North America. CTOS currently carries a Zacks Rank #4.
The Zacks Consensus Estimate for Custom Truck’s 2021 bottom line implies a year-over-year decline of 15.4%. The consensus mark for 2021 loss per share has widened from 86 cents to $1.05 over the past seven days. Earnings estimates for 2022 have declined by 4 cents a share over the same time frame.
Hawaiian Holdings: Hawaiian Holdings, the parent of Hawaiian Airlines, is headquartered in Honolulu County. In fact, it is Hawaii's biggest airline and has been serving the islands for more than 85 years. HA currently carries a Zacks Rank #4 and a VGM Score of C.
The Zacks Consensus Estimate for Hawaiian Holdings’ 2021 loss per share has widened from $7.33 to $8.18 over the past 60 days. The consensus mark for earnings for the next year has been downwardly revised from $1.09 per share to 66 cents over the same time frame.
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 backtesting 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.