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Discard These 4 Toxic Stocks or Sell Short for Profit
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The secret behind successful investing is the proper identification of overhyped toxic stocks and the correctly priced ones. However, it is not easy to accurately pinpoint toxic stocks and abandon them at the right time to make some gains at the end.
Overblown toxic stocks are usually susceptible to outside shocks and loaded with a huge amount of debt. Also, the price of toxic stocks is unrealistically high. However, the inflated price of the toxic stocks is only short-lived as it is higher than its intrinsic value.
The unreasonably inflated price of toxic stocks can be due to either an irrational exuberance associated with them or some serious fundamental drawbacks inherent in the stock. Owning such bloated stocks for a long stretch of time can be harmful to investors and may result in huge loss of wealth.
Investors may gain from the correct identification of toxic stocks with the help of an investing strategy known as 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, identifying 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.
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 four of the 16 toxic stocks that showed up on the screen:
Covanta Holding Corporation is a Morristown, NJ-based alternative energy company that provides waste and energy services in the United States and Canada. In the past 30 days, the Zacks Consensus Estimate for the current quarter remained unchanged at 20 cents per share. The company has a Zacks Rank #4 (Sell).
Bethpage, NY-based Altice USA, Inc. (ATUS - Free Report) is a leading broadband communications and video services provider in the United States. In the past 30 days, the Zacks Consensus Estimate for the current quarter has changed from earnings of a penny to a loss of a penny. The company has a Zacks Rank #4.
Houston, TX-based Archrock, Inc. (AROC - Free Report) is a pure-play US natural gas contract compression services company. Over the past month, the Zacks Consensus Estimate for current quarter loss widened from 2 cents per share to 3 cents. The company carries a Zacks Rank #4.
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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Discard These 4 Toxic Stocks or Sell Short for Profit
The secret behind successful investing is the proper identification of overhyped toxic stocks and the correctly priced ones. However, it is not easy to accurately pinpoint toxic stocks and abandon them at the right time to make some gains at the end.
Overblown toxic stocks are usually susceptible to outside shocks and loaded with a huge amount of debt. Also, the price of toxic stocks is unrealistically high. However, the inflated price of the toxic stocks is only short-lived as it is higher than its intrinsic value.
The unreasonably inflated price of toxic stocks can be due to either an irrational exuberance associated with them or some serious fundamental drawbacks inherent in the stock. Owning such bloated stocks for a long stretch of time can be harmful to investors and may result in huge loss of wealth.
Investors may gain from the correct identification of toxic stocks with the help of an investing strategy known as 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, identifying 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.
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 four of the 16 toxic stocks that showed up on the screen:
Covanta Holding Corporation is a Morristown, NJ-based alternative energy company that provides waste and energy services in the United States and Canada. In the past 30 days, the Zacks Consensus Estimate for the current quarter remained unchanged at 20 cents per share. The company has a Zacks Rank #4 (Sell).
Bethpage, NY-based Altice USA, Inc. (ATUS - Free Report) is a leading broadband communications and video services provider in the United States. In the past 30 days, the Zacks Consensus Estimate for the current quarter has changed from earnings of a penny to a loss of a penny. The company has a Zacks Rank #4.
Wilmington, DE-based Incyte Corporation (INCY - Free Report) is a drug discovery company. Over the past month, the Zacks Consensus Estimate for current quarter loss widened from 48 cents per share to 50 cents. Incyte carries a Zacks Rank #3. You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.
Houston, TX-based Archrock, Inc. (AROC - Free Report) is a pure-play US natural gas contract compression services company. Over the past month, the Zacks Consensus Estimate for current quarter loss widened from 2 cents per share to 3 cents. The company carries a Zacks Rank #4.
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 »