Precise identification of rightly-priced stocks is the key to successful investing. However, in practice, overpriced toxic stocks and 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:
Minneapolis-based Ceridian HCM Holding Inc. CDAY is a provider of human capital management software. The firm offers recruiting, staff monitoring, payroll processing, employee engagement, and human capital management technology services. Over the past 60 days, the Zacks Consensus Estimate for current-quarter earnings per share has moved south by a penny to 10 cents. The stock currently has a Zacks Rank #4 (Sell).
Santa Clara, CA-based Palo Alto Networks, Inc. PANW offers network security solutions to enterprises, service providers and government entities worldwide. Over the past 30 days, the Zacks Consensus Estimate for current-quarter earnings per share has been revised downward by 31 cents. The stock currently has a Zacks Rank #4.
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 moved south by 6 cents. The stock currently has a Zacks Rank #3.
San Jose, CA-based Calix, Inc CALX is a global leader in access innovation. Over the past 90 days, the Zacks Consensus Estimate for current-quarter earnings per share has been revised downward 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.
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.