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5 Toxic Stocks to Get Rid Of or Play Short to Make Gains
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Accurate identification of overpriced stocks and correctly priced stocks is the key to investing success. But this is a tough task as the overhyped stocks and the fairly priced stocks are intermingled in the market place in a very deceptive way. Investors who can spot the over-bubble toxic stocks and abandon them at the right time are likely to make profits.
Usually, toxic stocks are vulnerable to external shocks and are encumbered with huge debts. Also, the unjustifiably high price of toxic stocks can’t sustain for long as the current price of these stocks exceeds their intrinsic values. Over time, these stocks are bound to result in losses for investors.
Exaggerated 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 a longer period of time, you are sure to see big erosion in your wealth.
However, if you can figure out the toxic stocks precisely, you may benefit 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, just like identifying stocks with robust growth potential, picking up toxic stocks and abandoning them at the right time is the key to guard your portfolio from big losses or make profits 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 and the next fiscal year 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.
Here are five of the 22 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 estimates declined 5.9% to 16 cents. The stock currently has a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Covanta Holding Corporation is a Morristown, NJ-based alternative energy company that provides waste and energy services in the U.S. and Canada. Over the past 30 days, its current quarter estimates widened from a loss of 18 cents per share to a loss of 20 cents. The company has a Zacks Rank #3.
Etsy, Inc. (ETSY - Free Report) is a Brooklyn, NY-based Internet services company. It operates a marketplace to make, sell and buy goods online and offline worldwide. Over the last 30 days, its current quarter estimate has narrowed down from a penny per share to a “no loss no profit” situation. The company has a Zacks Rank #3.
Wilmington, DE-based Incyte Corporation (INCY - Free Report) is a drug discovery company. Over the last 30 days, its current quarter estimate widened from a loss of 72 cents per share to a loss of 83 cents. Incyte carries a Zacks Rank #3.
Waltham, MA-based AMAG Pharmaceuticals, Inc. is a biopharmaceutical company that manufactures, develops, and commercializes therapeutics for women health, anemia management, and cancer supportive care in the U.S. AMAG Pharmaceuticals carries a Zacks Rank #3.
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.
Zacks Restaurant Recommendations: In addition to dining at these special places, you can feast on their stock shares. A Zacks Special Report spotlights 5 recent IPOs to watch plus 2 stocks that offer immediate promise in a booming sector. Download it free »
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5 Toxic Stocks to Get Rid Of or Play Short to Make Gains
Accurate identification of overpriced stocks and correctly priced stocks is the key to investing success. But this is a tough task as the overhyped stocks and the fairly priced stocks are intermingled in the market place in a very deceptive way. Investors who can spot the over-bubble toxic stocks and abandon them at the right time are likely to make profits.
Usually, toxic stocks are vulnerable to external shocks and are encumbered with huge debts. Also, the unjustifiably high price of toxic stocks can’t sustain for long as the current price of these stocks exceeds their intrinsic values. Over time, these stocks are bound to result in losses for investors.
Exaggerated 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 a longer period of time, you are sure to see big erosion in your wealth.
However, if you can figure out the toxic stocks precisely, you may benefit 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, just like identifying stocks with robust growth potential, picking up toxic stocks and abandoning them at the right time is the key to guard your portfolio from big losses or make profits 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 and the next fiscal year 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.
Here are five of the 22 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 estimates declined 5.9% to 16 cents. The stock currently has a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Covanta Holding Corporation is a Morristown, NJ-based alternative energy company that provides waste and energy services in the U.S. and Canada. Over the past 30 days, its current quarter estimates widened from a loss of 18 cents per share to a loss of 20 cents. The company has a Zacks Rank #3.
Etsy, Inc. (ETSY - Free Report) is a Brooklyn, NY-based Internet services company. It operates a marketplace to make, sell and buy goods online and offline worldwide. Over the last 30 days, its current quarter estimate has narrowed down from a penny per share to a “no loss no profit” situation. The company has a Zacks Rank #3.
Wilmington, DE-based Incyte Corporation (INCY - Free Report) is a drug discovery company. Over the last 30 days, its current quarter estimate widened from a loss of 72 cents per share to a loss of 83 cents. Incyte carries a Zacks Rank #3.
Waltham, MA-based AMAG Pharmaceuticals, Inc. is a biopharmaceutical company that manufactures, develops, and commercializes therapeutics for women health, anemia management, and cancer supportive care in the U.S. AMAG Pharmaceuticals carries a Zacks Rank #3.
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.
Zacks Restaurant Recommendations: In addition to dining at these special places, you can feast on their stock shares. A Zacks Special Report spotlights 5 recent IPOs to watch plus 2 stocks that offer immediate promise in a booming sector. Download it free »