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Steer Clear Of These 5 Toxic Stocks Before It's Too Late
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Not all stocks that recently scaled lofty heights will be able to sustain their good show. In fact, some of these stocks, whose current value surpassed their actual potential, are bound to result in loss for investors over time.
No matter what the broader market is doing, stocks without sturdy fundamentals are toxic for your portfolio. Identifying such bloated stocks accurately and dumping them at the right time can protect your returns.
Overpricing of these toxic stocks can be ascribed to either an irrational exuberance associated with them or some serious fundamental drawbacks. And if you own such stocks for a long period of time, you are likely to see significant erosion of your wealth.
However, if you can rightly figure out such toxic stocks, you may gain in a bear market by resorting to an investing strategy called short selling. This strategy allows one to sell a stock first and then buy it when the price falls. While short selling excels in bear markets, it typically loses money in bull markets.
So, just like picking promising stocks, detecting toxic stocks and discarding them at the right time is crucial to shielding one’s portfolio from big losses or making profits by short selling them.
Screening Criteria
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 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.
Here are five stocks that made it through the screen:
Myriad Genetics, Inc. (MYGN - Free Report) : The American molecular diagnostic company employs a number of proprietary technologies to target the genetic basis of human diseases and the role these genes might play in the onset, progression and treatment of the respective diseases. Over the past 30 days, its fiscal 2020 earnings estimates have declined from 32 cents to 4 cents. Currently, the company carries a Zacks Rank #4 (Sell).
Cardiovascular Systems, Inc. : Headquartered in St. Paul, MN, the company is a medical device manufacturer that develops and commercializes innovative solutions to treat patients suffering from peripheral and coronary arterial diseases. Over the past 30 days, its fiscal 2020 earnings estimates have declined by 3 cents. Currently, the company carries a Zacks Rank #3.
Harmonic Inc. (HLIT - Free Report) : This American technology company enables media companies and service providers to deliver ultra-high-quality broadcast and OTT video services to consumers globally. Over the past 30 days, its fiscal 2020 earnings estimates have declined from 30 cents to 18 cents. Currently, the company carries a Zacks Rank #3.
Mimecast Limited : Headquartered in London, Mimecast offers cloud security and risk management services for corporate information and email primarily in the United States, the United Kingdom and South Africa. Over the past 30 days, its fiscal 2020 earnings estimates have declined by a penny to 47 cents. Currently, the company carries a Zacks Rank #3.
IAC/INTERACTIVECORP (IAC - Free Report) : IAC is a leading media and Internet company with more than 150 brands and products. Over the past 30 days, its fiscal 2020 earnings estimates have declined from $4.81 to $4.15. Currently, the company carries a Zacks Rank #3.
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.
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.
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Steer Clear Of These 5 Toxic Stocks Before It's Too Late
Not all stocks that recently scaled lofty heights will be able to sustain their good show. In fact, some of these stocks, whose current value surpassed their actual potential, are bound to result in loss for investors over time.
No matter what the broader market is doing, stocks without sturdy fundamentals are toxic for your portfolio. Identifying such bloated stocks accurately and dumping them at the right time can protect your returns.
Overpricing of these toxic stocks can be ascribed to either an irrational exuberance associated with them or some serious fundamental drawbacks. And if you own such stocks for a long period of time, you are likely to see significant erosion of your wealth.
However, if you can rightly figure out such toxic stocks, you may gain in a bear market by resorting to an investing strategy called short selling. This strategy allows one to sell a stock first and then buy it when the price falls. While short selling excels in bear markets, it typically loses money in bull markets.
So, just like picking promising stocks, detecting toxic stocks and discarding them at the right time is crucial to shielding one’s portfolio from big losses or making profits by short selling them.
Screening Criteria
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 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 stocks that made it through the screen:
Myriad Genetics, Inc. (MYGN - Free Report) : The American molecular diagnostic company employs a number of proprietary technologies to target the genetic basis of human diseases and the role these genes might play in the onset, progression and treatment of the respective diseases. Over the past 30 days, its fiscal 2020 earnings estimates have declined from 32 cents to 4 cents. Currently, the company carries a Zacks Rank #4 (Sell).
Cardiovascular Systems, Inc. : Headquartered in St. Paul, MN, the company is a medical device manufacturer that develops and commercializes innovative solutions to treat patients suffering from peripheral and coronary arterial diseases. Over the past 30 days, its fiscal 2020 earnings estimates have declined by 3 cents. Currently, the company carries a Zacks Rank #3.
Harmonic Inc. (HLIT - Free Report) : This American technology company enables media companies and service providers to deliver ultra-high-quality broadcast and OTT video services to consumers globally. Over the past 30 days, its fiscal 2020 earnings estimates have declined from 30 cents to 18 cents. Currently, the company carries a Zacks Rank #3.
Mimecast Limited : Headquartered in London, Mimecast offers cloud security and risk management services for corporate information and email primarily in the United States, the United Kingdom and South Africa. Over the past 30 days, its fiscal 2020 earnings estimates have declined by a penny to 47 cents. Currently, the company carries a Zacks Rank #3.
IAC/INTERACTIVECORP (IAC - Free Report) : IAC is a leading media and Internet company with more than 150 brands and products. Over the past 30 days, its fiscal 2020 earnings estimates have declined from $4.81 to $4.15. Currently, the company carries a Zacks Rank #3.
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.