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 #4 (Sell): We have not considered Buy or Hold rated stocks that generally outperform the market or move in line with the same.
You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.
Here are the three toxic stocks that showed up on the screen:
Headquartered in New York, Etsy, Inc. (ETSY - Free Report) offers e-commerce services. It provides online and offline marketplaces to buy and sell goods. Over the past 30 days, the Zacks Consensus Estimate for next-year earnings has moved south by 20 cents per share. The stock currently has a Zacks Rank #4.
Based in Saskatoon Cameco Corporation (CCJ - Free Report) is one of the world's largest uranium producers, a significant supplier of conversion services and one of two CANDU fuel manufacturers in Canada. Over the past 30 days, the Zacks Consensus Estimate for next-year earnings has moved south by four cents per share. The stock currently has a Zacks Rank #4.
California-based Live Nation Entertainment, Inc. (LYV - Free Report) is the world's premier live entertainment company, consisting of Live Nation, Ticketmaster and Front-Line Management Group. The company engages in producing, marketing, and selling live concerts for artists via its concert pipe. Over the past 30 days, the Zacks Consensus Estimate for next-year earnings has moved south by 20 cents per share. The stock currently has a Zacks Rank #5 (Strong Sell).
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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.