Accurate identification of correctly-priced stocks is the key to successful investing. However, in practice, overpriced toxic stocks and the rightly-priced stocks are intermixed in such a manner that it is tough to distinguish between the two.
Generally overhyped toxic stocks are susceptible to external shocks. Moreover, these stocks are burdened with a large 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 is higher than its true intrinsic value.
Investors are likely to benefit from correct 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 identifying 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 20 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 loss per share has remained unchanged at 4 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.
Wilmington, DE-based Incyte Corporation (INCY - Free Report) is a drug discovery company. Over the past 30 days, the Zacks Consensus Estimate for current-year earnings per share has declined from $2.12 to $2.03. The stock currently has a Zacks Rank #5 (Strong Sell).
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 30 days, the Zacks Consensus Estimate for current year earnings per share has declined from 10 cents to 5 cents. At present, the company has a Zacks Rank #3.
Frederick, MD-based U.S. Silica Holdings, Inc. (SLCA - Free Report) is a producer of industrial minerals, including sand proppants, whole grain silica, ground silica, fine ground silica, calcined kaolin clay and aplite clay. Over the past 30 days, the Zacks Consensus Estimate for current-quarter loss per share has widened from 2 cents to 6 cents. 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.