Accurate identification of correctly-priced stocks is the key to successful investing. However, in reality, rightly-priced stocks and overpriced toxic stocks are intermixed in such a way that it is difficult to distinguish one from the other.
Generally, overhyped toxic stocks are susceptible to external shocks. Moreover, these stocks are burdened with a huge amount of debt. The price of these stocks is artificially inflated. Nonetheless, the higher price of toxic stocks is only temporary in nature as it exceeds 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, accurately spotting toxic stocks and abandoning 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 eight toxic stocks that showed up on the screen:
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 has remained unchanged at 2 cents per share. The stock has a Zacks Rank #4 (Sell).
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 has remained unchanged at a loss of 18 cents per share. The company currently has a Zacks Rank #4.
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 loss has remained unchanged at a penny 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.
El Segundo, CA-based Mattel, Inc. (MAT - Free Report) is the world’s largest manufacturer of toys. Over the past 30 days, the Zacks Consensus Estimate for current-quarter loss has widened from 4 cents per share to 8 cents. 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.