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Sever Your Ties With These 4 Toxic Stocks to Ward Off Losses

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Wall Street has endured the most painful first half in more than 50 years. Severe bouts of volatility are expected to continue in the near term amid geopolitical tensions, sky-high inflation and Fed’s aggressive stance. In times of such uncertainty, it’s as important to get rid of fundamentally weak toxic stocks as it is to invest in attractively valued companies possessing fundamental strength.

Generally, toxic stocks are vulnerable to external shocks and are loaded with high levels of debt. Also, the price of toxic stocks is irrationally high. The unjustifiably high price of the toxic stocks is only short-lived as the intrinsic value of these stocks is lower than the current bloated price. The inflated price of the toxic stocks can be ascribed to either an irrational exuberance associated with them or some serious fundamental lacunae in the stock. If you own such stocks for a long period, you are likely to witness huge erosion in your wealth. Zalando SE (ZLNDY - Free Report) , Radius Global Infrastructure Inc. (RADI - Free Report) , Ormat Technologies (ORA - Free Report) and Ligand Pharmaceuticals (LGND - Free Report) are a few such toxic stocks.

Investing success hinges upon precise identification of overpriced stocks and fairly priced ones. However, the over-hyped toxic stocks and the correctly priced stocks are mingled in the marketplace in such a way that it becomes very tough to differentiate between them. Investors who can pinpoint the toxic stocks and discard them at the right time are likely to gain.

On the other hand, if you can figure out the toxic stocks correctly, you may 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, picking up toxic stocks and abandoning them at the right time is the key to protect your portfolio from big losses. Profits can be made by short-selling them.

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: Ahigh 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 35 toxic stocks that showed up on the screen:

Zalando: Headquartered in Berlin, Zalando is an online fashion retailer. The company offers clothing, sports products, shoes, bags and other accessories for men, women and children. The Zacks Consensus Estimate for ZLNDY’s 2022 earnings and sales implies a year-over-year decline of 73% and 13%, respectively. The estimate for 2022 and 2023 earnings has moved south by a penny in the past seven days. Zalando currently carries a Zacks Rank #4 (Sell) and has a VGM Score of F.

Radius Global: New York-based 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 Zacks Consensus Estimate for RADI’s 2022 bottom line is currently pegged at a loss of 7 cents a share. The estimate has deteriorated from earnings of 6 cents a share 60 days ago. The consensus mark for earnings for the next year has also declined 20 cents over the past 60 days. Radius Global currently carries a Zacks Rank #4 and has a VGM Score of F.

Ormat: Nevada-based Ormat company designs, develops, owns and operates clean, environmentally friendly geothermal and recovered energy-based power plants. The Zacks Consensus Estimate for ORA’s 2022 earnings implies a year-over-year decline of 12.2%. The consensus mark for 2022 earnings has moved south by 4 cents over the past seven days. For the next year, the estimate has also declined 6 cents over the same timeframe. Ormat currently carries a Zacks Rank #4 and has a VGM Score of D.

Ligand: Ligand is a biotechnology company focused on the development and licensing of biopharmaceutical assets. This California-based firm’s business model is based on developing or acquiring royalty revenue-generating assets and coupling them with a lean corporate cost structure.The Zacks Consensus Estimate for LGND’s 2022 earnings and sales implies a year-over-year decline of 66% and 40.6%, respectively. The Zacks Consensus Estimate for Ligand’s 2022 earnings has moved south by 34 cents per share over the past 30 days. LGND 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.