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Spot the Red Flags & Sell These 5 Toxic Stocks Right Away

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One important criterion for successful investing is the accurate identification of overblown toxic stocks and the rightly priced ones. However, in practice, it is not easy to precisely distinguish these two categories of stocks. Investors who can correctly spot the overpriced stocks and shun them at the right time are the ones likely to make a profit. Ligand Pharmaceuticals (LGND - Free Report) , Alarm.com Holdings, Inc. (ALRM - Free Report) , Radius Global Infrastructure Inc. (RADI - Free Report) , ADT Inc. (ADT - Free Report) and Madison Square Garden Entertainment Corp (MSGE - Free Report) are a few such toxic stocks.

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, you are sure to make a huge loss in your wealth.

The 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.

On the contrary, 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 protecting your portfolio from big losses or making 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 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 a 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 0: Negative EPS estimate revision for the current and 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 the five stocks out of the 26 that made it through the screen:

Ligand is a biotechnology company focused on the development and licensing of biopharmaceutical assets. This San Diego-based firm’s business model is based on developing or acquiring royalty revenue-generating assets and coupling them with a lean corporate cost structure. Ligand’s dependence on the Captisol program and Captisol-based partnerships is concerning.

The Zacks Consensus Estimate for LGND’s 2022 earnings and sales implies a year-over-year decline of 60% and 40%, respectively. The Zacks Consensus Estimate for Ligand’s 2022 earnings has moved south by 40 cents per share over the past 30 days. The consensus mark for earnings for the next year has also declined 66 cents over the 30 seven days. LGND currently carries a Zacks Rank #5 (Strong Sell) and has a VGM Score of C.

Alarm.com: Alarm.com offers interactive security solutions for home and business owners. The company offers security systems, which include image sensors, crash and smash protection, web control, mobile access and video monitoring. Alarm.com is based in Vienna..

The Zacks Consensus Estimate for Alarm.com’s 2022 earnings implies a year-over-year decline of 5.5%. The estimate has moved south by a cent per share over the past 30 days. The consensus mark for earnings for the to-be-reported quarter signals a year-over-year contraction of 24%. ALRM currently carries a Zacks Rank #4 (Sell) and has a VGM Score of D.

Radius Global: Radius Global, through its subsidiary AP WIP Investments LLC, is an owner of a growing, diversified portfolio of primarily triple net rental streams from wireless operators and tower companies for properties. The company is headquartered in New York.

Over the trailing four quarters, Radius Global missed earnings estimates on three occasions and beat once, the average negative surprise being 210.7%. The Zacks Consensus Estimate for RADI’s loss for fiscal 2022 is pegged at 7 cents a share. The estimate has deteriorated from earnings of 6 cents a share 30 days ago to a loss of 7 cents a share. The consensus mark for earnings for the next year has also declined 20 cents over the past 30 days. Radius Global currently carries a Zacks Rank #4 and has a VGM Score of C.

ADT: Based in the Unites States, ADT is a smart home solution providing company. With the buyout of Sunpro Solar in December 2021, the company is also a provider of residential solar solutions. It has a large network of security, home automation, and solar-installation professionals in the United States. As of Dec 31, 2021, ADT had around 6.6 million recurring revenue customers.

Over the trailing four quarters, ADT missed earnings estimates on all occasions, the average negative surprise being 129.1%. The Zacks Consensus Estimate for ADT’s 2022 earnings has moved south by 60 cents per share over the past 30 days. The consensus mark for earnings for the next year has also declined 61 cents over the past 30 days. ADT currently carries a Zacks Rank #4.

Madison Square: Based in New York, Madison Squareprovides entertainment experiences. The company presents or hosts events at its diverse venues, New York's Madison Square Garden, Hulu Theater at Madison Square Garden, Radio City Music Hall and Beacon Theatre; the Forum in Inglewood, CA and The Chicago Theatre. Also, under the MSG Entertainment umbrella is Tao Group Hospitality, with entertainment dining and nightlife brands, including Tao, Marquee, Lavo, Avenue, Beauty & Essex and Cathédrale.

Over the trailing four quarters, Madison Square missed earnings estimates on all occasions, the average negative surprise being 101.5%. The Zacks Consensus Estimate for MSGE’s loss for fiscal 2022 is pegged at $3.28 a share. The estimate has moved south by $1.18 per share over the past 30 days. The consensus mark for earnings for the next fiscal year has also declined 38 cents over the past 30 days. Madison Square currently carries a Zacks Rank #4 and has a VGM Score of C.

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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.