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4 Toxic Stocks to Discard or Sell Short for Solid Gains

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Accurate identification of correctly priced stocks is the key to successful investing. But overpriced toxic stocks and the rightly priced stocks are intertwined in such a way that it is not very easy to distinguish them.

Usually, pricey toxic stocks are vulnerable to external shocks. Also, these stocks are loaded with a high amount of debt. The price of these stocks is artificially pushed up. However, the higher price of toxic stocks is only short-lived in nature as it is above its true intrinsic value.

Investors may gain from precise identification of toxic stocks with the help of an investing strategy called short selling. This strategy allows investors 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, finding out toxic stocks and discarding or short selling them at the right time is the key to guard your portfolio from big losses.

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 17 toxic stocks that showed up on the screen:

Covanta Holding Corporation (CVA - Free Report) is a Morristown, NJ-based alternative energy company that provides waste and energy services in the United States and Canada. In the last 30 days, the Zacks Consensus Estimate for the current quarter remained unchanged at a loss of 10 cents per share.  The company currently has a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Woburn, MA-based Monotype Imaging Holdings Inc. (TYPE - Free Report) is engaged in empowering expression and engagement through a combination of type, technology and expertise. In the last 30 days, the Zacks Consensus Estimate for the current quarter remained unchanged at 11 cents per share.  The company currently has a Zacks Rank #3.

Live Nation Entertainment, Inc. (LYV - Free Report) is a Beverly Hills, CA-based live entertainment company. Over the last 30 days, the Zacks Consensus Estimate for current-quarter earnings remained unchanged at 22 cents per share. The stock currently has a Zacks Rank #3.

Baltimore, MD-based WillScot Corporation (WSC - Free Report) is a specialty rental services company, offering modular space and portable storage solutions. Over the last 30 days, the Zacks Consensus Estimate for current-quarter earnings remained unchanged at 2 cents per share. The stock currently has a Zacks Rank #4 (Sell).
 
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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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