Back to top

Image: Bigstock

5 Toxic Stocks to Get Rid Of or Play Short to Make Gains

Read MoreHide Full Article

The secret of successful investing lies in the proper identification of overpriced and reasonably priced stocks. In a complex market place, overblown stocks and the correctly priced ones are intertwined in such a way that it is not easy to distinguish between them. However, spotting the bloated toxic stocks on a regular basis and abandoning them at the right time is one of the secrets to a winning investment strategy.

Usually, toxic companies are characterized by huge debt burdens and are vulnerable to external shocks. Irrationally high price of the toxic stocks is short-lived as their current price is higher than their intrinsic value and these are bound to result in loss for investors over time.

Overpricing of the toxic stocks can be ascribed to either an irrational exuberance surrounding them or some serious fundamental drawbacks. If you own such bubble stocks for an inordinate period of time, you are bound to see massive erosion of wealth.

However, if you are a smart investor and can precisely spot such toxic stocks, you may gain by resorting to an investing strategy called short selling. This strategy allows you 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 pinpointing stocks with growth potential, identifying toxic stocks and discarding them at the right time is crucial to shield your portfolio from big losses or make 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 increased 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 -5: Negative EPS estimate revision for this fiscal year and the next during the past 12 weeks points to analysts' pessimism.

Zacks Rank more than or equal to #3 (Hold): We have not considered 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 33 toxic stocks that showed up on the screen:

Cushman Wakefield PLC (CWK - Free Report) : Chicago-based Cushman is a real estate services firm. Over the past 60 days, 2020 earnings estimates for this Zacks Rank #5 (Strong Sell) company have declined 27.2% to 83 cents a share. The metric suggests year-over-year fall of 49.4%.

Stoneridge, Inc. (SRI - Free Report) : Michigan-based Stoneridge designs and manufactures engineered electrical and electronic components, modules, as well as systems. Over the past 60 days, 2020 earnings estimates for this Zacks Rank #4 (Sell) company have deteriorated to a loss of 47 cents per share from earnings of 53 cents. The metric suggests a year-over-year decline of 132%.

Bottomline Technologies, Inc. (EPAY - Free Report) : New Hampshire-based Bottomline Technologies provides collaborative payment, invoice, and document automation solutions to corporations, financial institutions, as well as banks on a worldwide basis. Over the past 60 days, 2020 earnings estimates for this Zacks Rank #4 company have moved south from $1.33 per share to $1.16. The metric depicts a year-over-year decline of 14.1%.

New Fortress Energy LLC (NFE - Free Report) : New-York based New Fortress Energy operates as an integrated gas-to-power company. Over the past 60 days, 2020 earnings estimates for this Zacks Rank #4 company have deteriorated to a loss of 15 cents per share from earnings of 30 cents. Notably, the firm missed estimates in each of the trailing four quarters, with the average being 27.1%.

Trinseo SA (TSE - Free Report) : Pennsylvania-based Trinseo manufactures emulsion polymers and plastics. Over the past 60 days, 2020 earnings estimates for this Zacks Rank #4 company have deteriorated to a loss of 14 cents per share from earnings of $1.69. The metric suggests a year-over-year decline of 136.4%.

Get the rest of the stocks on the list and start putting this and other ideas to the test. It can all be done with the Research Wizard stock picking and back-testing software.

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 athttps://www.zacks.com/performance