Precise identification of rightly priced stocks is the key to successful investing. However, it is not easy to distinguish these from toxic stocks, which need to be abandoned at the right time.
Overpriced toxic stocks are usually susceptible to external shocks. Moreover, these stocks are burdened with huge amount of debts. The price of these stocks is artificially inflated. However, the higher price of toxic stocks is only temporary in nature as it is higher than its true intrinsic value.
Investors may benefit from accurate identification of toxic stocks with the help of an investing strategy called short selling. This strategy allows investors 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, figuring toxic stocks and discarding or short selling them at the right time is the key to guard your portfolio from big losses.
Here is a winning strategy that will help you to 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 -5: 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 Buy-rated stocks that generally outperform the market.
Here are five of the 15 toxic stocks that showed up on the screen:
Covanta Holding Corp (NYSE:CVA) is a Morristown, NJ-based alternative energy company that provides waste and energy services in the United States and Canada. In the past 30 days, the Zacks Consensus Estimate for the current quarter loss widened from 2 cents to 10 cents per share. The company currently has a Zacks Rank #3.
Live Nation Entertainment, Inc. (NYSE:LYV) is a Beverly Hills, CA-based live entertainment company. Over the past month, the Zacks Consensus Estimate for current-quarter earnings remained unchanged at 34 cents per share. The stock currently has a Zacks Rank #4 (Sell).
Leawood, KS-based AMC Entertainment Holdings Inc (NYSE:AMC) is engaged in the theatrical exhibition business. Over the past month, the Zacks Consensus Estimate for current quarter earnings declined from 8 cents per share to 7 cents. The stock currently has a Zacks Rank #4.
Hanover, MD-based KEYW Holding Corp. (NASDAQ:KEYW) is engaged in cyber security and cyber superiority solutions to defense, intelligence and national security agencies. Over the past seven days, the Zacks Consensus Estimate for current-quarter loss remained unchanged at 2 cents per share. The stock has a Zacks Rank #3.
Norwell, MA-based Clean Harbors Inc (NYSE:CLH) is a leading provider of environmental, energy and industrial services in North America. Over the past month, the Zacks Consensus Estimate for current-quarter earnings declined from 31 cents per share to 30 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.
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