Precise identification of rightly-priced stocks is the key to successful investing. However, in practice, overpriced toxic stocks and the correctly-priced stocks are intertwined in such a manner that it is difficult to distinguish between the two.
Generally overhyped toxic stocks are susceptible to outside shocks. Moreover, these stocks are loaded with a high level of debt. The price of these stocks is artificially inflated. Nonetheless, the higher price of toxic stocks is only short-lived as it is higher than its true intrinsic value.
Investors are likely to benefit from precise 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 abandoning or short selling those at the right time is the key to safeguard 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 16 toxic stocks that showed up on the screen:
Illinois-based Camping World Holdings Inc. CWH is a provider of services, protection plans, products, and resources for recreational vehicles (RV) enthusiasts. The firm offers new and used RVs for sale, vehicle service, and maintenance through its retail locations and membership clubs. Over the past 30 days, the Zacks Consensus Estimate for current-quarter earnings has moved south by at 23 cents per share. The stock currently has a Zacks Rank #5 (Strong Sell).
Las Vegas-based Golden Entertainment, Inc. GDEN is a gaming company providing casino, and lottery services. Over the past 30 days, the Zacks Consensus Estimate for current-quarter earnings per share has been revised downward 16 cents. The stock currently has a Zacks Rank #4 (Sell).
Netherlands-based Wright Medical Group N.V. is a medical device company, engaged in providing extremity and biologic solutions. Over the past 30 days, the Zacks Consensus Estimate for current-quarter earnings has decreased by 6 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.
Texas-based Exterran Corporation EXTN) is an oilfield equipment supplier, offering compression, production and processing products and services of the oil and natural gas industry. Over the past 30 days, the Zacks Consensus Estimate for current-year loss per share has widened from 21 cents to 45 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.