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4 Toxic Stocks to Eliminate From Your Portfolio Now

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Investing in a stock whose current price is not rationally justified by its true potential is sure to result in loss over time. Identifying such bloated stocks accurately and dumping them at the right time can protect your portfolio.
 
Overpricing of these toxic stocks can be attributed to either an irrational exuberance associated with them or some serious drawbacks. And if you own such stocks for an inordinate period of time, you are likely to see a significant erosion of your wealth.

Nonetheless, if you can correctly detect such toxic stocks, you may gain in a bear market 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. Naturally, short selling excels in bear markets, while it typically loses money in bull markets.

So, just like identifying promising stocks, detecting toxic stocks and dumping them at the right time are crucial to safeguarding one’s portfolio from big losses or earning profits by short selling them. Illumina Inc. (ILMN - Free Report) , Tactile Systems Technology (TCMD - Free Report) , Custom Truck One Source (CTOS - Free Report) and Gannett Co. Inc. (GCI - Free Report) are a few such toxic stocks.  

Screening Criteria

Here is a winning strategy that will help you 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 28 toxic stocks that showed up on the screen:

Illumina: San Diego-based Illumina is a life sciences company that provides tools and integrated systems for the analysis of genetic variation and function. The stock currently carries a Zacks Rank #5 (Strong Sell) and has a VGM Score of D.

The Zacks Consensus Estimate for Illumina’s 2022 earnings per share implies a year-over-year decline of 27%. The consensus mark for the next year has been revised 20.4% downward over the past 60 days. Estimates for ILMN’s 2021 earnings have also moved south by 51 cents over the same time frame.

Tactile Systems: Headquartered in Minneapolis, Tactile Systems is a medical technology company that develops medical devices for the treatment of chronic diseases at home. The stock currently carries a Zacks Rank #5 and has a VGM Score of D.

The Zacks Consensus Estimate for Tactile System’s 2021 bottom line implies a year-over-year decline of 300%. The consensus mark for the current year has deteriorated from earnings per share of 45 cents to a loss of 12 cents over the past 60 days. Estimates for TCMD’s 2022 earnings have also declined 81.4% over the same time frame.

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 (Sell). The company incurred a wider-than-expected loss per share in the last reported quarter.

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.

Gannett: U.S.-based Gannett is a digitally-focused media and marketing solutions company. GCI currently carries a Zacks Rank #4. The company missed earnings estimates in the last reported quarter.

The Zacks Consensus Estimate for Gannett’s 2021 bottom line is pegged at a loss of 86 cents a share, implying a year-over-year deterioration of 30%. The loss estimate has widened from 47 cents a share to 86 cents over the past 60 days. The consensus mark for 2022 earnings has also declined 87% over the same time frame. Estimates for GCI’s 2021 and 2022 sales also call for a year-over-year decrease of 5.7% and 4.6%, respectively.

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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.