Just like selecting good and undervalued stocks on a regular basis is one of the keys to investing success, identifying and proactively getting rid of toxic stocks is also crucial to maximizing portfolio returns.
A toxic stock is basically one that trades at a price not supported by its fundamental strength. Moreover, these stocks generally have a high level of debt. The price of these stocks is artificially inflated. Irrational exuberance associated with a stock may lead to overpricing. Owning such stocks for an inordinate period could lead to erosion of wealth for an investor.
However, if you can correctly identify the toxic stocks, you may also gain by resorting to an investment technique called short selling. In short selling, one can sell an un-owned stock and then purchase it when the price falls. Naturally, short selling has excelled in bear markets, while it typically loses money in bull markets.
As such, identifying toxic stocks is also imperative in shielding one’s portfolio from massive losses or making profits by short selling them.
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 #3: We have not considered the Buy-rated stocks that generally outperform the market. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Here are five of the 10 stocks that made it through the screen:
Braskem S.A. (BAK - Free Report) ) is the largest petrochemical operations in Latin America and also features among the five largest private companies in Brazil. Over the past 90 days, the Zacks Consensus Estimate for fiscal 2020earnings has moved down by 13 cents per share. The stock currently has a Zacks Rank #5 (Strong Sell).
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 90 days, the Zacks Consensus Estimate for fiscal 2020 earnings has moved south by 24 cents per share. The stock currently has a Zacks Rank #4 (Sell).
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. Over the past 60 days, the Zacks Consensus Estimate for fiscal 2020 earnings has moved south by 6 cents per share. The stock currently has a Zacks Rank #3 (Hold).
Based in Milwaukee, Gardner Denver Holdings, Inc. (GDI - Free Report) is a provider of mission-critical flow control and compression equipment and associated aftermarket parts, consumables and services. Over the past 90 days, the Zacks Consensus Estimate for fiscal 2020 earnings has moved south by 15 cents per share. The stock currently has a Zacks Rank #3.
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 fiscal 2020 earnings has moved down by 12 cents per share. 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.