Accurate identification of overpriced stocks and correctly priced stocks is the key to investing success. However, it is a tough task to differentiate between a fairly priced stock and an overhyped stock in a complicated market place. Investors who can spot exorbitantly priced toxic stocks and abandon them at the right time are likely to maximize portfolio returns.
Toxic stocks are usually characterized by a high debt burden and are vulnerable to external shocks.Also, there might be some serious weakness latent in the company.The unjustifiably high price of toxic stocks does not last long as the current price of these stocks exceeds their intrinsic values. Owning such stocks for a prolonged period could lead to massive erosion of wealth.
However, if you can figure out the toxic stocks precisely, you may benefit by resorting to an investing strategy called short selling—– in which one can sell a stock first and then purchase it when its price falls.While short selling excels in bear markets, it typically loses money in bull markets.
So, just like picking stocks with huge growth potential, figuring out toxic stocks and abandoning them at the right time is the key to shield your portfolio from big losses or make 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 (Hold): 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 13 stocks that made it through the screen:
Carrols Restaurant Group, Inc. (TAST - Free Report) : Carrols is the largest BURGER KING franchisee in the United States, with more than800 restaurants. Over the past30 days, its 2020 earningsestimates have declined from 11 cents to 9 cents.Currently, the company carries a Zacks Rank #5 (Strong Sell).
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 past30 days, its 2020 earnings estimates have declined by a penny to 22 cents. Currently, the company carries a Zacks Rank #5.
Etsy, Inc. (ETSY - Free Report) : Headquartered in New York, Etsy 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 2020 earnings has moved south by 20 cents. The stock currently has a Zacks Rank #4 (Sell).
FirstService Corporation (FSV - Free Report) : FirstService offers property services to commercial, institutional and residential customers primarily in North America and internationally. Over the past 90 days, the Zacks Consensus Estimate for 2020 earnings has moved south by 20 cents. The stock currently has a Zacks Rank #3.
CryoLife, Inc.(CRY - Free Report) : CryoLife is a leader in medical device manufacturing and distribution of implantable living human tissues for use in cardiac and vascular surgeries. Over the past 90 days, the Zacks Consensus Estimate for 2020 earnings has moved south by 3 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.