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Cast Aside These 3 Toxic Stocks to Improve Portfolio Health
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Investors with the ability to differentiate between overhyped and pricey toxic stocks and the correctly priced ones emerge winners at the end. However, precise identification of these two types of stocks is not simple as these are entangled in the market place in a very complex way. Investors who can accurately spot toxic stocks and get rid of them at the right time are set to gain.
MercadoLibre, Inc. (MELI - Free Report) , Vonage Holdings Corp and Las Vegas Sands Corp (LVS - Free Report) are a few toxic stocks that you should get rid of to avoid portfolio bleeding.
Most of the times, the overpriced toxic stocks are susceptible to external shocks and are loaded with a hefty amount of debt. Moreover, the price of toxic stocks is unrealistically high. The high price of toxic stocks is only short-lived as the intrinsic value of the toxic stocks falls short of the current bloated price.
The irrationally high price of toxic stocks can be attributed to either an irrational exuberance associated with them or some fundamental drawbacks associated with the stock. Owning such stocks for an inordinate period of time is harmful to investors and may lead to huge erosion of wealth.
On the other side, investors may benefit from the accurate identification of toxic stocks with the help of an investing strategy called short selling. This strategy allows them 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, figuring out toxic stocks and discarding 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: 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 #4 (Sell): We have not considered Buy-rated stocks that generally outperform the market.
Here are the three toxic stocks that showed up on the screen:
MercadoLibre: Based in Uruguay, MELI operates online commerce platforms in Latin America. Its various products enable businesses, merchants, and individuals to list merchandise and conduct sales and purchases online. Over the trailing four quarters, MercadoLibre has topped earnings estimates twice for as many misses.
The Zacks Consensus Estimate for 2022 earnings has moved south by 15 cents over the past 60 days. The consensus mark for earnings for the next year has also declined 56 cents over the past 60 days. MELI currently carries a Zacks Rank #5 (Strong Sell) and has a VGM Score of C.
Vonage: U.S.-based Vonage offers consumers and small businesses an affordable alternative to traditional telephone service by providing cloud communications services. Over the trailing four quarters, VG lagged earnings estimates thrice and surpassed once, with the average negative surprise being 67.5%.
The Zacks Consensus Estimate for 2022 earnings is pegged at 11 cents per share, implying a year-over-year decline of 8.33%. The consensus mark has moved south by 3 cents over the past 30 days. Vonage currently carries a Zacks Rank #5 and has a VGM Score of D.
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. 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 73 cents a share, widening from 64 cents 30 days ago. The consensus mark for earnings for the next year has declined 30 cents over the past 30 days. Las Vegas Sands currently carries a Zacks Rank #4 and has a VGM Score of F.
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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Cast Aside These 3 Toxic Stocks to Improve Portfolio Health
Investors with the ability to differentiate between overhyped and pricey toxic stocks and the correctly priced ones emerge winners at the end. However, precise identification of these two types of stocks is not simple as these are entangled in the market place in a very complex way. Investors who can accurately spot toxic stocks and get rid of them at the right time are set to gain.
MercadoLibre, Inc. (MELI - Free Report) , Vonage Holdings Corp and Las Vegas Sands Corp (LVS - Free Report) are a few toxic stocks that you should get rid of to avoid portfolio bleeding.
Most of the times, the overpriced toxic stocks are susceptible to external shocks and are loaded with a hefty amount of debt. Moreover, the price of toxic stocks is unrealistically high. The high price of toxic stocks is only short-lived as the intrinsic value of the toxic stocks falls short of the current bloated price.
The irrationally high price of toxic stocks can be attributed to either an irrational exuberance associated with them or some fundamental drawbacks associated with the stock. Owning such stocks for an inordinate period of time is harmful to investors and may lead to huge erosion of wealth.
On the other side, investors may benefit from the accurate identification of toxic stocks with the help of an investing strategy called short selling. This strategy allows them 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, figuring out toxic stocks and discarding 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: 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 #4 (Sell): 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 three toxic stocks that showed up on the screen:
MercadoLibre: Based in Uruguay, MELI operates online commerce platforms in Latin America. Its various products enable businesses, merchants, and individuals to list merchandise and conduct sales and purchases online. Over the trailing four quarters, MercadoLibre has topped earnings estimates twice for as many misses.
The Zacks Consensus Estimate for 2022 earnings has moved south by 15 cents over the past 60 days. The consensus mark for earnings for the next year has also declined 56 cents over the past 60 days. MELI currently carries a Zacks Rank #5 (Strong Sell) and has a VGM Score of C.
Vonage: U.S.-based Vonage offers consumers and small businesses an affordable alternative to traditional telephone service by providing cloud communications services. Over the trailing four quarters, VG lagged earnings estimates thrice and surpassed once, with the average negative surprise being 67.5%.
The Zacks Consensus Estimate for 2022 earnings is pegged at 11 cents per share, implying a year-over-year decline of 8.33%. The consensus mark has moved south by 3 cents over the past 30 days. Vonage currently carries a Zacks Rank #5 and has a VGM Score of D.
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. 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 73 cents a share, widening from 64 cents 30 days ago. The consensus mark for earnings for the next year has declined 30 cents over the past 30 days. Las Vegas Sands currently carries a Zacks Rank #4 and has a VGM Score of F.
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.