The key to successful investing is the accurate identification of rightly priced stocks. But, in reality, rightly priced stocks and overpriced toxic stocks are intertwined in such a way that it is not an easy task to distinguish between them.
Usually, overblown toxic stocks are susceptible to external shocks. Also, these stocks are burdened with a high level of debt. The price of these stocks is artificially inflated. However, the higher price of toxic stocks is only temporary in nature as it is higher than its true intrinsic value.
Investors may gain from proper 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, accurately figuring out toxic stocks and abandoning or short selling them at the right time is the key to protect your portfolio from big losses.
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:
Live Nation Entertainment, Inc. (LYV - Free Report) is a Beverly Hills, CA-based live entertainment company. Over the past 30 days, the Zacks Consensus Estimate for current-quarter earnings has remained unchanged at 65 cents per share. The stock currently has a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Ion Geophysical Corporation (IO - Free Report) is a leading provider of geophysical technology, services, and solutions for the global oil & gas industry. Over the past 30 days, the Zacks Consensus Estimate for current-quarter earnings has declined from 94 cents per share to 91 cents. The stock currently has a Zacks Rank #5 (Strong Sell).
Saint Paul, MN-based Cardiovascular Systems, Inc. (CSII - Free Report) is a medical device company. Over the past 30 days, the Zacks Consensus Estimate for current-quarter earnings has changed from earnings of a penny to a loss of 3 cents. The stock currently has a Zacks Rank #3.
Montreal, Canada-based Osisko Gold Royalties Ltd (OR - Free Report) is a mining company engaged in exploration and mining for gold and other precious metals. Over the past 30 days, the Zacks Consensus Estimate for current-quarter earnings has remained unchanged at 2 cents per share. The stock currently has a Zacks Rank #3.
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 »