Investors with the ability to differentiate between overhyped and pricey toxic stocks and the correctly priced ones emerge winners at the end. However, precise identification of these two types of stocks is not simple as these are entangled in the market place in a very complex way. Investors who can accurately spot toxic stocks and get rid of them at the right time are set to gain.
Most of the times, the overpriced toxic stocks are susceptible to external shocks and are loaded with a hefty amount of debt. Moreover, the price of toxic stocks is unrealistically high. The high price of toxic stocks is only short-lived as the intrinsic value of the toxic stocks falls short of the current bloated price.
The irrationally high price of toxic stocks can be attributed to either an irrational exuberance associated with them or some fundamental drawbacks associated with the stock. Owning such stocks for an inordinate period of time is harmful to investors and may lead to huge erosion of wealth.
On the other side, investors may benefit from the accurate identification of toxic stocks with the help of an investing strategy called short selling. This strategy allows them 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, figuring out toxic stocks and discarding them at the right time is the key to protect 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 24 toxic stocks that showed up on the screen:
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 the current quarter declined from 16 cents per share to 10 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.
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 declined from 33 cents per share to 31 cents. The stock currently has a Zacks Rank #3.
Fort Myers, FL-based NeoGenomics, Inc. (NEO - Free Report) is a clinical laboratory that focuses on cancer genetics diagnostic testing. Over the past month, the Zacks Consensus Estimate for current quarter earnings declined from 6 cents per share to 4 cents. The stock currently has a Zacks Rank #5 (Strong Sell).
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 loss widened from 8 cents per share to 13 cents. The stock currently has a Zacks Rank #3.
Leawood, KS-based AMC Entertainment Holdings, Inc. (AMC - Free Report) is engaged in the theatrical exhibition business. Over the past month, the Zacks Consensus Estimate for current quarter earnings declined from 52 cents per share to 34 cents. 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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