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Save Your Portfolio by Getting Rid of These 4 Toxic Stocks

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Successful investing calls for the appropriate identification of overpriced and correctly priced stocks. In practice, the overhyped toxic stocks and the fairly priced stocks are intermixed in the marketplace in such a way that it becomes difficult to distinguish between them. Investors who can correctly spot the overpriced stocks and shun them at the right time are the ones likely to make a profit.

Usually, toxic stocks are fraught with huge debt loads and are susceptible to external shocks. Also, the unjustifiably high price of the toxic stocks is short-lived as the intrinsic value of these stocks is less than their current price. Quite naturally, if you own such toxic stocks for a long period of time, you are sure to make a huge loss in your wealth. Surgery Partners, Inc. (SGRY - Free Report) , Sendas Distribuidora (ASAI - Free Report) , Blackbaud Inc. (BLKB - Free Report) and Azenta Inc. (AZTA - Free Report) are some such toxic stocks that you need to cut ties with.

Higher price of the toxic stocks can be attributed to either an irrational exuberance associated with them or some serious fundamental lacuna. If you own such stocks for long, you are likely to see a big loss in your wealth.

If you can accurately pinpoint the toxic stocks, you are likely to gain by resorting to an investing strategy called short selling. This strategy allows you 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 picking up stocks with strong growth potential, pinpointing toxic stocks and abandoning them at the right time is the key to protect your portfolio from big losses or make profits by short selling them.

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 increased 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 over 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.

Blackbaud: Blackbaud is a cloud software company working for social causes. This Zacks Rank #5 (Strong Sell) company combines technology and expertise to help organizations achieve their missions.

The Zacks Consensus Estimate for Blackbaud’s 2022 bottom line implies a year-over-year decline of 2%. The consensus mark for 2022 earnings has been revised downward by 22 cents to $2.92 per share over the past seven days. BLKB has a VGM Score of C.

Azenta: Azenta is a provider of life sciences solutions, offering reliable cold-chain sample management solutions and genomic services for pharmaceutical, biotech, academic, and healthcare institutions. AZTA currently carries a Zacks Rank #5 and has a Value Score of D.

In the last reported quarter, Azenta reported earnings of 12 cents a share, missing the consensus mark of 78 cents. The company has a trailing four-quarter negative earnings surprise of 0.6%, on average. The consensus mark for fiscal 2022 EPS has been revised downward by 56 cents over the past seven days.

Surgery Partners: Surgery Partners is a healthcare services company focusing on providing solutions for surgical and related ancillary care in support of both patients as well as physicians. SGRY currently carries a Zacks Rank #4 (Sell).

In the last reported quarter, Surgery Partners incurred a quarterly loss 5 cents per share, wider than the Zacks Consensus Estimate of a loss of 4 cents. It missed earnings estimates in three out of trailing four quarters, while beating once. The consensus mark for SGRY’s 2022 EPS has moved south by 3 cents over the past 60 days.

Sendas Distribuidora: 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.

The Zacks Consensus Estimate for Sendas Distribuidora’s 2022 bottom line implies a year-over-year decline of 31.3%. The consensus mark for 2022 earnings has been revised downward by a penny to 11 cents per share over the past 30 days.

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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.