Accurate identification of rightly-priced stocks is the key to successful investing. However, in reality, overpriced toxic stocks and the correctly-priced stocks are intertwined in such a manner that it is tough to distinguish between the two.
Usually overpriced 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 intrinsic value.
Investors are likely to gain 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, accurately identifying toxic stocks and discarding or short selling those at the right time can guard 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 23 toxic stocks that showed up on the screen:
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-year earnings has declined from 26 cents to 12 cents. The stock currently has a Zacks Rank #5 (Strong Sell).
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 has widened from 12 cents to 14 cents. The stock currently has a Zacks Rank #3 (Hold).You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Etsy, Inc. (ETSY - Free Report) is a Brooklyn, NY-based Internet services company. It operates a marketplace to make, sell and buy goods online and offline worldwide. In the past seven days, the Zacks Consensus Estimate for current-year earnings per share has remained unchanged at 71 cents.The company has a Zacks Rank #4 (Sell).
SM Energy Company (SM - Free Report) is a Denver, CO-based independent energy company engaged in the exploration, exploitation, development, acquisition, and production of natural gas and crude oil.In the past seven days, the Zacks Consensus Estimate for current-year loss has widened from 13 cents to 18 cents.The company 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.