Accurate identification of rightly-priced stocks is the key to successful investing. However, in practice, it is difficult to determine whether a stock is overpriced or is trading close to its intrinsic value.
Generally, toxic stocks are susceptible to outside shocks. Moreover, these stocks have a high level of debt. The price of these stocks is artificially inflated. Nonetheless, the high price is only short-lived as it is higher than its true intrinsic value.
Investors are likely to benefit from the identification of toxic stocks with the help of an investing strategy called short selling. This allows investors to sell a stock first and then buy it when its price falls.
While short selling excels in bear markets, it doesn’t work 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 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:
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. Over the past 30 days, the Zacks Consensus Estimate for next-year earnings has moved south by 14 cents per share. The stock currently has a Zacks Rank #5 (Strong Sell).
Headquartered in Massachusetts, PTC Inc. (PTC - Free Report) develops, markets, and supports software solutions. The company offers enterprise solutions and desktop solutions. Over the past 30 days, the Zacks Consensus Estimate for next-year earnings has moved down by 15 cents per share. The stock currently has a Zacks Rank #4.
Texas-based Exterran Corporation (EXTN - Free Report) is an oilfield equipment supplier, offering compression, production and processing products and services in the oil and natural gas industry. Over the past 30 days, the Zacks Consensus Estimate for next-year loss per share has widened from 4 cents to 94 cents. The stock currently has a Zacks Rank #4.
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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.