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 way that it is tough to distinguish between the two.
Usually overhyped toxic stocks are susceptible to outside shocks. Also, these stocks are loaded with a high level of debt. The price of these stocks is artificially kept inflated. Nonetheless, the higher price of toxic stocks is only short-lived as it exceeds its true intrinsic value.
Investors are likely to benefit from proper 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 is the key to 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 17 toxic stocks that showed up on the screen:
San Jose, CA-based Calix (CALX - Free Report) is a global leader in access innovation. Over the past 30 days, the Zacks Consensus Estimate for current-quarter earnings per share has declined from 10 cents to 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.
Morristown, NJ-based Covanta Holding (CVA - Free Report) is predominantly engaged in the business of waste and energy services. It provides waste and energy solution to its customers by processing the waste and generating energy out of it. It is named Energy-from-Waste (EfW). Over the past 30 days, the Zacks Consensus Estimate for current-quarter earnings per share has declined from 11 cents to 8 cents. The stock currently has a Zacks Rank #3.
Kennesaw, GA-based CryoLife (CRY - Free Report) is a leader in medical device manufacturing and distribution and processing and distribution of implantable living human tissues for use in cardiac and vascular surgeries. Over the past 30 days, the Zacks Consensus Estimate for current-quarter earnings per share has declined from 7 cents to 4 cents. The stock currently has a Zacks Rank #3.
McLean, VA-based GTT Communications (GTT - Free Report) offers cloud networking; high bandwidth IP transit for content delivery and hosting as well as network-to-network carrier interconnects solutions and data connectivity solutions. Over the past 30 days, the Zacks Consensus Estimate for current-quarter loss per share has widened from 3 cents to 5 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.