There are always some stocks which experience irrationally high price levels at a given time period. For these stocks, the current bloated price is higher than their intrinsic value. The good show of the toxic stocks does not last long and these are bound to result into loss for investors over time.
Usually, toxic companies are characterized by huge debt loads and are vulnerable to external shocks. Accurately figuring such overblown stocks and getting rid of them at the right time can protect your portfolio.
Overpricing of these toxic stocks is either due to irrational exuberance associated with them or some serious fundamental drawbacks. And if you own such stocks for a long period of time, you are likely to see significant erosion of your wealth.
However, if you can correctly identify such toxic stocks, you may gain in a bear market 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 selecting promising stocks, finding out toxic stocks and dumping them at the right time is crucial to safeguard one’s portfolio from big losses or making profits by short selling them.
Here is a winning strategy that will help you identify the overhyped toxic stocks:
Most recent Debt/Equity Ratio greater than the median industry average:High debt/equity ratio implies high leverage. And 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 and the next fiscal year during the past 12 weeks point to analysts’ pessimism.
Zacks Rank more than or equal to #3: 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 five of the 19 toxic stocks that showed up on the screen:
PTC Inc. (PTC - Free Report) is a Needham, MA-based software company engaged in developing, marketing and supporting software solutions. Over the past one-month period, the current quarter earnings estimate has remained stable at 29 cents. The stock currently has a ZacksRank #4 (Sell).
The Woodlands, TX-based Conns Inc. (CONN - Free Report) is a specialty retailer, which currently operates retail locations in Texas and Louisiana. Over the last 30 days, its current quarter loss estimate widened from a loss of 6 cents to a loss of 19 cents. Conns carries a Zacks Rank #3 (Hold).
Capital Senior Living Corp. CSU based in Dallas, TX is engaged in providing senior living services in the U.S. Over the last 30 days, quarterly estimates changed from a no loss, no gain situation to a loss of 1 cent. Capital Senior Living carries a Zacks Rank #3.
Live Nation Entertainment, Inc. LYV is a Beverly Hills, CA-based live entertainment company. Over the past 30 days, the current quarter estimate has remained stable at 49 cents per share. The stock currently has a Zacks Rank #3.
Pleasanton, CA-based ZELTIQ Aesthetics, Inc. (ZLTQ - Free Report) is a medical technology company. Over the past 30 days, its current quarter estimate has remained unchanged at 6 cents per share. The company carries a Zacks Rank #3.
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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 at: https://www.zacks.com/performance.
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