Accurate identification of the correctly-priced stocks is the key for successful investing. However, in practice, correctly-priced stocks and overpriced toxic stocks are intermixed in such a way that it is difficult to distinguish those.
Generally, overpriced toxic stocks are vulnerable to external shocks. Moreover, these stocks are burdened with a large amount of debt. The price of these stocks is artificially inflated. Nonetheless, the elevated price of toxic stocks is only short-lived in nature as it is higher than its true intrinsic value.
Investors are likely to benefit from accurate 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 price falls.
While short selling excels in bear markets, it typically loses money in bull markets.
So, precisely pinpointing toxic stocks, and abandoning or short selling those at the right time is the key to cushioning 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 14 toxic stocks that showed up on the screen:
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 seven days, the Zacks Consensus Estimate for current-quarter earnings remained unchanged at 5 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.
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 remained unchanged at a loss of one cent per share. Currently, the stock carries a Zacks Rank of 3.
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 past seven days, the Zacks Consensus Estimate for the current quarter remained unchanged at 12 cents. At present, the company has a Zacks Rank #3.
Southfield, MI-based Superior Industries International, Inc. (SUP - Free Report) is one of the world’s largest designers and manufacturers of aluminum road wheels for the automotive industry. Over the past seven days, the Zacks Consensus Estimate for the ongoing quarter remained unchanged at a loss of 18 cents per share. The company 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.