Successful investing depends upon the accurate identification of the correctly priced stocks. However, in practice, the rightly priced stocks and the overpriced toxic stocks are intertwined in such a way that it is very difficult to distinguish between them.
Usually, overhyped toxic stocks are susceptible to external shocks. Moreover, these stocks are burdened with huge amount of debts. 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 are likely to gain from accurate identification of the 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 price falls.
While short selling excels in bear markets, it typically loses money in bull markets.
Therefore, accurately identifying 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 19 toxic stocks that showed up on the screen:
Vancouver, Canada-based First Majestic Silver Corp. (AG - Free Report) is engaged in the production, development, exploration, and acquisition of silver mines in Mexico. Over the past 30 days, the Zacks Consensus Estimate for current-quarter earnings has changed from a gain of 5 cents per share to a loss of 3 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.
Toronto, Canada-based Agnico Eagle Mines Limited (AEM - Free Report) is a gold producer with mining operations in Canada, Mexico and Finland, and exploration activities in Canada, Europe, Latin America and the United States. Over the past 30 days, the Zacks Consensus Estimate for current-quarter earnings has changed from 8 cents per share to 6 cents. The stock currently has a Zacks Rank #3.
Leawood, KS-based AMC Entertainment Holdings, Inc. (AMC - Free Report) operates as a theatrical exhibition company primarily in the United States. Over the past 30 days, the Zacks Consensus Estimate for current-quarter earnings has widened from a loss of 41 cents to a loss of 45 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.
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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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