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5 Toxic Stocks to Offload or Play Short for Profit

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Investing success largely depends on precise identification of overpriced stocks. However, overblown toxic stocks and the correctly priced stocks are intertwined in the market place in such a way that it is indeed tough to spot them. Investors who can figure out the bubble stocks and abandon them at the right time are the ones who are likely to benefit.

Toxic stocks are generally susceptible to external shocks and burdened with huge debts. In fact, the irrationally high price of the toxic stocks is short-lived as the intrinsic value of these stocks lags their current price. So, quite obviously, if you own such toxic stocks for aninordinate period of time, you are likely to witness huge loss in your wealth.

Steep pricing of the toxic stocks can be ascribed to either an irrational exuberance associated with them or some serious fundamental drawbacks.

However, if you can, correctly pinpoint the toxic stocks, 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, just like identifying stocks with growth potential, spotting toxic stocks and abandoning them at the right time is the key to protect 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 21 toxic stocks that showed up on the screen:

Salesforce.com, inc. CRM is a San Francisco, CA-based computer software industry firm. Over the past one month period, its second quarter earnings estimate has declined 18.2% to 9 cents a share. Currently, the company carries a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Boston, MA-based, Vertex Pharmaceuticals Incorporated (VRTX - Free Report) is a bio-technology company. Over the past one-month period, the second quarter estimate has remained unchanged at 5 cents per share. The stock currently has a Zacks Rank #3.

Live Nation Entertainment, Inc. LYV is a Beverly Hills, CA-based live entertainment company. Over the past seven days, its second-quarter 2017 estimate remained unchanged at 17 cents a share.

Covanta Holding Corporation CVA 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 second quarter estimates narrowed from a loss of 16 cents per share to a loss of 15 cents.  The company has a Zacks Rank #3.

Etsy, Inc. ETSY 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 second quarter estimate changed from a break-even point to a loss of a cent per share. The company has 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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