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Since the beginning of 2022, markets have been bearing the brunt of macroeconomic and geopolitical uncertainty. Rising interest rates and inflationary concerns are keeping investors at the edge. In this volatile market environment, new long trade initiations should be kept to a minimum and targeted only toward the top-performing industry groups and individual stocks.
The most important thing during bear markets is avoiding big errors.Regardless of your market approach to investing or trading, there is only one way to protect your portfolio from a large loss. Selling at a small loss before it snowballs into a large loss is the only way to ensure that a devastating drawdown does not occur within the context of a portfolio.
Considering the current market mood filled with ambiguity, it’s as important to get rid of fundamentally weak toxic stocks as it is to invest in attractively valued companies possessing fundamental strength.
Toxic companies are usually characterized by huge debt loads and are vulnerable to external shocks. These stocks might illusively scale lofty heights in a given time period but the good show doesn’t last for these overblown toxic stocks, as their current price is not justified by their fundamental strength. Accurately identifying such bloated stocks and getting rid of them at the right time can protect your portfolio.
Overpricing of these toxic stocks can be attributed to either an irrational enthusiasm surrounding them or some serious fundamental drawbacks. If you own such bubble stocks for an inordinate period of time, you are bound to see massive erosion of wealth.
Nonetheless, if you can precisely spot such toxic stocks, you may gain by resorting to an investing strategy called short selling. This strategy allows one 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 identifying stocks with growth potential, pinpointing toxic stocks and offloading them at the right time is crucial to guard one’s portfolio against big losses or make profits by short selling them. Definitive Healthcare Corp (DH - Free Report) , Cinemark Holdings, Inc. (CNK - Free Report) , MeridianLink Inc. (MLNK - Free Report) and Spirit AeroSystems Holdings, Inc. (SPR - Free Report) are a few such toxic stocks.
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 four of the 24 toxic stocks that showed up on the screen:
Definitive Healthcare: Based in Framingham, DH provides healthcare commercial intelligence. The company's SaaS platform creates new paths in the healthcare market. The company currently carries a Zacks Rank #5 (Strong Sell) and has a VGM Score of D. The Zacks Consensus Estimate for Definitive Healthcare for 2022 and 2023 earnings has moved south by 3 cents and 6 cents, respectively, in the past 60 days.
Cinemark Holdings: Based in Plano, Cinemark is one of the leaders in the motion picture exhibition industry. It operates 521 theaters with 5,855 screens in 42 states in the United States and internationally in 15 countries, mainly in South and Central America. The Zacks Consensus Estimate for Cinemark’s 2022 bottom line is pegged at a loss of $1.42 a share. The consensus mark for 2022 loss has widened by 98 cents in the past 30 days. CNK currently carries a Zacks Rank #4 (Sell).
MeridianLink: Based in Costa Mesa, MeridianLink is a cloud-based technology company, which enables banks, credit unions, mortgage lenders, specialty lending providers and consumer reporting agencies to streamline loan decision-making, loan origination, and customer collection workflows. The Zacks Consensus Estimate for MLNK 2022 and 2023 earnings has moved south by 6 cents and 9 cents, respectively, in the past 30 days. The stock currently carries a Zacks Rank #4 and a VGM Score of F.
Spirit AeroSystems: Based in Wichita, Spirit AeroSystems engineers, manufactures, and markets commercial aerostructures. The Zacks Consensus Estimate for the 2022 bottom line is pegged at a loss of $1.91 a share, widening from $1.25 a share 30 days ago. The consensus mark for the 2022 bottom line has moved south by 36% over the past 30 days. The company missed earnings in three of the trailing four quarters, while topping once, with the average negative surprise being 100.3%. SPR currently carries a Zacks Rank #4 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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4 Toxic Stocks That May Give You a Tough Time
Since the beginning of 2022, markets have been bearing the brunt of macroeconomic and geopolitical uncertainty. Rising interest rates and inflationary concerns are keeping investors at the edge. In this volatile market environment, new long trade initiations should be kept to a minimum and targeted only toward the top-performing industry groups and individual stocks.
The most important thing during bear markets is avoiding big errors.Regardless of your market approach to investing or trading, there is only one way to protect your portfolio from a large loss. Selling at a small loss before it snowballs into a large loss is the only way to ensure that a devastating drawdown does not occur within the context of a portfolio.
Considering the current market mood filled with ambiguity, it’s as important to get rid of fundamentally weak toxic stocks as it is to invest in attractively valued companies possessing fundamental strength.
Toxic companies are usually characterized by huge debt loads and are vulnerable to external shocks. These stocks might illusively scale lofty heights in a given time period but the good show doesn’t last for these overblown toxic stocks, as their current price is not justified by their fundamental strength. Accurately identifying such bloated stocks and getting rid of them at the right time can protect your portfolio.
Overpricing of these toxic stocks can be attributed to either an irrational enthusiasm surrounding them or some serious fundamental drawbacks. If you own such bubble stocks for an inordinate period of time, you are bound to see massive erosion of wealth.
Nonetheless, if you can precisely spot such toxic stocks, you may gain by resorting to an investing strategy called short selling. This strategy allows one 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 identifying stocks with growth potential, pinpointing toxic stocks and offloading them at the right time is crucial to guard one’s portfolio against big losses or make profits by short selling them. Definitive Healthcare Corp (DH - Free Report) , Cinemark Holdings, Inc. (CNK - Free Report) , MeridianLink Inc. (MLNK - Free Report) and Spirit AeroSystems Holdings, Inc. (SPR - Free Report) are a few such toxic stocks.
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.
Here are four of the 24 toxic stocks that showed up on the screen:
Definitive Healthcare: Based in Framingham, DH provides healthcare commercial intelligence. The company's SaaS platform creates new paths in the healthcare market. The company currently carries a Zacks Rank #5 (Strong Sell) and has a VGM Score of D. The Zacks Consensus Estimate for Definitive Healthcare for 2022 and 2023 earnings has moved south by 3 cents and 6 cents, respectively, in the past 60 days.
Cinemark Holdings: Based in Plano, Cinemark is one of the leaders in the motion picture exhibition industry. It operates 521 theaters with 5,855 screens in 42 states in the United States and internationally in 15 countries, mainly in South and Central America. The Zacks Consensus Estimate for Cinemark’s 2022 bottom line is pegged at a loss of $1.42 a share. The consensus mark for 2022 loss has widened by 98 cents in the past 30 days. CNK currently carries a Zacks Rank #4 (Sell).
MeridianLink: Based in Costa Mesa, MeridianLink is a cloud-based technology company, which enables banks, credit unions, mortgage lenders, specialty lending providers and consumer reporting agencies to streamline loan decision-making, loan origination, and customer collection workflows. The Zacks Consensus Estimate for MLNK 2022 and 2023 earnings has moved south by 6 cents and 9 cents, respectively, in the past 30 days. The stock currently carries a Zacks Rank #4 and a VGM Score of F.
Spirit AeroSystems: Based in Wichita, Spirit AeroSystems engineers, manufactures, and markets commercial aerostructures. The Zacks Consensus Estimate for the 2022 bottom line is pegged at a loss of $1.91 a share, widening from $1.25 a share 30 days ago. The consensus mark for the 2022 bottom line has moved south by 36% over the past 30 days. The company missed earnings in three of the trailing four quarters, while topping once, with the average negative surprise being 100.3%. SPR currently carries a Zacks Rank #4 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.