Investing success hinges upon precise identification of overpriced stocks and fairly priced stocks. But the overhyped toxic stocks and the rightly priced stocks are intermixed in the market place in such a way it becomes very tough to differentiate between them. Investors who can correctly spot toxic stocks and abandon them at the right time are likely to gain.
Generally, toxic stocks are vulnerable to external shocks and are loaded with high amount of debts. Also, price of the toxic stocks is irrationally high. The unjustifiably high price of the toxic stocks is only temporary as their intrinsic value is lower than the current bloated price.
The inflated price of toxic stocks can be either due to an irrational exuberance associated with them or some serious fundamental drawbacks in the stock. Owning such stocks for an inordinate period of time may lead to huge loss of wealth.
On the other hand, investors may gain from the precise identification of toxic stocks with the help of 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, spotting toxic stocks and abandoning them at the right time is the key to safeguard your portfolio from big losses. Profits can be made by short selling them.
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 20 toxic stocks that showed up on the screen:
Oklahoma City, OK-based Continental Resources, Inc. (CLR - Free Report) is a crude-oil concentrated, independent oil and natural gas exploration and production company. Over the past month, its Zacks Consensus Estimate for current quarter earnings remained unchanged at break-even point. The stock currently has a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Carbonite, Inc. (CARB - Free Report) is a Boston, MA-based computer services company engaged in providing cloud backup and restore solutions to small and medium sized businesses. Over the past month, its Zacks Consensus Estimate for current quarter earnings remained unchanged at 21 cents per share. The stock currently has a Zacks Rank #3.
PTC Inc. (PTC - Free Report) is a Needham, MA-based software company engaged in developing, marketing and supporting software solutions. Over the past month, the Zacks Consensus Estimate for current quarter earnings remained unchanged at 37 cents. The stock currently has a Zacks Rank #3.
Quincy, IL-based Titan International, Inc. (TWI - Free Report) is engaged in manufacturing and sale of wheels, tires, wheel and tire assemblies, and undercarriage systems and components for off-highway vehicles. Over the past month, the Zacks Consensus Estimate for current quarter earnings remained unchanged at a penny per share. The stock currently has a Zacks Rank #5 (Strong Sell).
Houston, TX-based Apache Corporation (APA - Free Report) is engaged in exploration, development and production of natural gas, crude oil and natural gas liquids. Over the past month, the Zacks Consensus Estimate for current quarter earnings declined from 8 cents to 4 cents per share. The stock currently 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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