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Reshuffle Your Portfolio & Say Bye to These 3 Toxic Stocks
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The stock market is reeling under a plethora of headwinds including 41-year high inflation, a hawkish Fed, the Russia-Ukraine war and severe supply chain chaos. Consumers are grappling with high food and fuel prices. The Fed’s actions to tame inflation are not yielding the desired results. Economists warn of an economic slowdown (as the best-case scenario) amid demand destruction owing to sky-high prices. GDP growth expectations for the year have been lowered. The U.S. economy is currently expected to grow 1.7% this year, down from the 2.8% growth expected just three months ago.
In these trying circumstances, reshuffling your portfolio gets all the more imperative. While it’s smart to bargain hunt for well-established stocks, it’s also equally important to dump fundamentally weak toxic stocks that can break your bank amid this market mayhem.
Lions Gate Entertainment Corp (LGF.A - Free Report) , Las Vegas Sands (LVS - Free Report) and USA Compression Partners, LP (USAC - Free Report) are a few such toxic stocks that you should discard to avoid portfolio bleeding.
Usually, toxic companies are vulnerable to external shocks. These companies are burdened with huge debts too. Also, the unjustifiably high price of the toxic stocks is short-lived as their current price exceeds their inherent value. Quite naturally, these stocks are bound to result in a loss for investors over time.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.
Distinguishing between overpriced and fairly priced stocks is the key to successful investing but not an easy task as the correctly priced and overvalued stocks are mingled in a very deceptive way in the marketplace. Investors who can pinpoint the overhyped toxic stocks and sell them at the right time are the ones poised to benefit.
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 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 -5: Negative EPS estimate revision for this fiscal year and the next during the past 12 weeks points to analysts’ pessimism.
Here are the three of the 15 toxic stocks that showed up on the screen:
Lions Gate: California-based Lions Gate develops and distributes film entertainment content. The company produces and distributes motion pictures for theatrical as well as straight-to-video release, and television programming. Lionsgate’s total debt (including Film obligations and production loans) was $3.15 billion as of Mar 31, 2022 compared with $3.14 billion as of Dec 31, 2021. The company's indebtedness compares unfavorably with a cash balance of $371.2 million.The economic downturn due to the coronavirus outbreak, stiff competition, escalating production costs, and lower profitability due to continuing investments in Starz are other concerns.
Over the trailing four quarters, Lions Gate missed earnings estimates on two occasions for as many misses, the average negative surprise being 4.2%. The Zacks Consensus Estimate for LGF.A’s fiscal 2023 earnings has moved south from 70 cents a share 30 days ago to 56 cents a share. The consensus mark for fiscal 2024 earnings has also declined 17 cents over the past 30 days. Lions Gate currently carries a Zacks Rank #5 (Strong Sell) and has a VGM Score of D.
USA Compression: USA Compression Partners is an energy infrastructure provider, which specializes in large-horsepower applications. With energy infrastructure being a capital-intensive business, USAC’s high debt levels (at around $2.02 billion) remain a cause of worry, restricting its financial freedom to tap into growth opportunities. Its debt-to-capitalization as of the end of March 2022 was 79.6%, deteriorating from 72.2% a year ago.Macro issues like higher transportation expenses, driver scarcity and labor shortages have limited the firm’s ability to ship packaged volumes to their customers.
Over the trailing four quarters, USAC missed earnings estimates on two occasions for as many misses, the average negative surprise being 27.6%. The Zacks Consensus Estimate for 2022 loss is pegged at 6 cents a share. The estimate has deteriorated from break-even earnings per unit 30 days ago to a loss of 6 cents. The consensus mark for earnings for the next year has also declined 2 cents over the past 30 days. USA Compression currently carries a Zacks Rank #4 (Sell).
Las Vegas Sands: Based in Las Vegas, LVS is an international developer of multi-use integrated resorts, primarily operating in the United States and Asia.As of Mar 31, 2022, the company had total debt of $14.95 billion compared with $14.77 billion at the end of Dec 31, 2021. In addition to debt woes, reports of tougher Macao casino regulations and a fresh surge of coronavirus cases, Las Vegas Sands’ operations in Macao are facing a double whammy. Heightened competition is an added concern.
Over the trailing four quarters, LVS missed earnings estimates on three occasions and beat once, the average negative surprise being 44.8%. The Zacks Consensus Estimate for 2022 loss is pegged at 64 cents a share. The estimate has deteriorated from earnings of 19 cents a share 60 days ago to a loss of 64 cents a share. The consensus mark for earnings for the next year has also declined 44 cents over the past 60 days. Las Vegas Sands currently carries a Zacks Rank #3 and has a VGM Score of F.
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.
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Reshuffle Your Portfolio & Say Bye to These 3 Toxic Stocks
The stock market is reeling under a plethora of headwinds including 41-year high inflation, a hawkish Fed, the Russia-Ukraine war and severe supply chain chaos. Consumers are grappling with high food and fuel prices. The Fed’s actions to tame inflation are not yielding the desired results. Economists warn of an economic slowdown (as the best-case scenario) amid demand destruction owing to sky-high prices. GDP growth expectations for the year have been lowered. The U.S. economy is currently expected to grow 1.7% this year, down from the 2.8% growth expected just three months ago.
In these trying circumstances, reshuffling your portfolio gets all the more imperative. While it’s smart to bargain hunt for well-established stocks, it’s also equally important to dump fundamentally weak toxic stocks that can break your bank amid this market mayhem.
Lions Gate Entertainment Corp (LGF.A - Free Report) , Las Vegas Sands (LVS - Free Report) and USA Compression Partners, LP (USAC - Free Report) are a few such toxic stocks that you should discard to avoid portfolio bleeding.
Usually, toxic companies are vulnerable to external shocks. These companies are burdened with huge debts too. Also, the unjustifiably high price of the toxic stocks is short-lived as their current price exceeds their inherent value. Quite naturally, these stocks are bound to result in a loss for investors over time.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.
Distinguishing between overpriced and fairly priced stocks is the key to successful investing but not an easy task as the correctly priced and overvalued stocks are mingled in a very deceptive way in the marketplace. Investors who can pinpoint the overhyped toxic stocks and sell them at the right time are the ones poised to benefit.
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 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 -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.
Cut Your Ties With These Stocks
Here are the three of the 15 toxic stocks that showed up on the screen:
Lions Gate: California-based Lions Gate develops and distributes film entertainment content. The company produces and distributes motion pictures for theatrical as well as straight-to-video release, and television programming. Lionsgate’s total debt (including Film obligations and production loans) was $3.15 billion as of Mar 31, 2022 compared with $3.14 billion as of Dec 31, 2021. The company's indebtedness compares unfavorably with a cash balance of $371.2 million.The economic downturn due to the coronavirus outbreak, stiff competition, escalating production costs, and lower profitability due to continuing investments in Starz are other concerns.
Over the trailing four quarters, Lions Gate missed earnings estimates on two occasions for as many misses, the average negative surprise being 4.2%. The Zacks Consensus Estimate for LGF.A’s fiscal 2023 earnings has moved south from 70 cents a share 30 days ago to 56 cents a share. The consensus mark for fiscal 2024 earnings has also declined 17 cents over the past 30 days. Lions Gate currently carries a Zacks Rank #5 (Strong Sell) and has a VGM Score of D.
USA Compression: USA Compression Partners is an energy infrastructure provider, which specializes in large-horsepower applications. With energy infrastructure being a capital-intensive business, USAC’s high debt levels (at around $2.02 billion) remain a cause of worry, restricting its financial freedom to tap into growth opportunities. Its debt-to-capitalization as of the end of March 2022 was 79.6%, deteriorating from 72.2% a year ago.Macro issues like higher transportation expenses, driver scarcity and labor shortages have limited the firm’s ability to ship packaged volumes to their customers.
Over the trailing four quarters, USAC missed earnings estimates on two occasions for as many misses, the average negative surprise being 27.6%. The Zacks Consensus Estimate for 2022 loss is pegged at 6 cents a share. The estimate has deteriorated from break-even earnings per unit 30 days ago to a loss of 6 cents. The consensus mark for earnings for the next year has also declined 2 cents over the past 30 days. USA Compression currently carries a Zacks Rank #4 (Sell).
Las Vegas Sands: Based in Las Vegas, LVS is an international developer of multi-use integrated resorts, primarily operating in the United States and Asia.As of Mar 31, 2022, the company had total debt of $14.95 billion compared with $14.77 billion at the end of Dec 31, 2021. In addition to debt woes, reports of tougher Macao casino regulations and a fresh surge of coronavirus cases, Las Vegas Sands’ operations in Macao are facing a double whammy. Heightened competition is an added concern.
Over the trailing four quarters, LVS missed earnings estimates on three occasions and beat once, the average negative surprise being 44.8%. The Zacks Consensus Estimate for 2022 loss is pegged at 64 cents a share. The estimate has deteriorated from earnings of 19 cents a share 60 days ago to a loss of 64 cents a share. The consensus mark for earnings for the next year has also declined 44 cents over the past 60 days. Las Vegas Sands currently carries a Zacks Rank #3 and has a VGM Score of F.
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.