Precise identification of the rightly-priced stocks holds the key to successful investing. However, in practice, correctly-priced stocks and overpriced toxic stocks are intertwined in such a way that it is tough to distinguish those.
Usually, overhyped toxic stocks are vulnerable to external shocks. Moreover, these stocks are loaded with a large amount of debt. The price of these stocks is artificially inflated. Nonetheless, the elevated 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 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, accurately figuring toxic stocks and discarding or short selling those 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 0: 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 12 toxic stocks that showed up on the screen:
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).
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.
Hanover, MD-based The KEYW Holding Corporation (KEYW - Free Report) is engaged in cyber security and cyber superiority solutions to defense, intelligence and national security agencies. Over the past seven days, the Zacks Consensus Estimate for current-quarter loss remained unchanged at 2 cents per share. The stock has a Zacks Rank #4.
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.
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.