Precise 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 way that it is difficult to distinguish between the two.
Generally, overhyped toxic stocks are susceptible to outside shocks. Also, these stocks are burdened with a high level of debt. The price of these stocks is artificially kept inflated. Nonetheless, the higher price of toxic stocks is only temporary as it exceeds its 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 correctly 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 24 toxic stocks that showed up on the screen:
Live Nation Entertainment, Inc. (LYV - Free Report) is a Beverly Hills, CA-based live entertainment company. Over the past 30 days, the Zacks Consensus Estimate for current-quarter earnings has remained unchanged at 39 cents 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.
San Jose, CA-based Calix, Inc (CALX - Free Report) is a global leader in access innovation. Over the past 30 days, the Zacks Consensus Estimate for current-quarter loss per share has remained unchanged at 3 cents. The stock currently has a Zacks Rank #3.
Vancouver, Canada-based Sandstorm Gold Ltd (SAND - Free Report) is a gold streaming company engaged in providing upfront financing for gold mining companies. Over the past 30 days, the Zacks Consensus Estimate for current-quarter earnings has remained unchanged at 2 cents per share. The stock currently has a Zacks Rank #3.
Spokane, WA-based Clearwater Paper Corporation (CLW - Free Report) produces and sells private label tissue and bleached paperboard products in the United States and internationally. Over the past 30 days, the Zacks Consensus Estimate for current-quarter earnings has remained unchanged at 15 cents per share. 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.