Precise identification of rightly-priced stocks is the key to successful investing. However, in reality, overpriced toxic stocks and correctly-priced stocks are intertwined in such a manner that it is difficult to distinguish between the two.
Generally, overhyped toxic stocks are vulnerable to external shocks. Moreover, these stocks are loaded with a huge amount of debt. The price of these stocks is artificially kept higher. Nonetheless, the higher price of toxic stocks is only transitory in nature as it is higher than its true intrinsic value.
Investors are likely to gain 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 price falls.
While short selling excels in bear markets, it typically loses money in bull markets.
So, correctly identifying toxic stocks and abandoning or short selling those at the right time is the key to protect 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 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 Buy-rated stocks that generally outperform the market.
Here are four of the 30 toxic stocks that showed up on the screen:
Frederick, MD-based U.S. Silica Holdings, Inc. is a producer of industrial minerals, including sand proppants, whole grain silica, ground silica, fine ground silica, calcined kaolin clay and aplite clay. Over the past 30 days, the Zacks Consensus Estimate for current-quarter loss per share has widened from 2 cents to 4 cents. The stock currently has a Zacks Rank #3.
Toronto, Canada-based Agnico Eagle Mines Limited is a gold producer, with mining operations in Canada, Mexico and Finland, and exploration activities in Canada, Europe, Latin America and the United States. Over the past seven days, the Zacks Consensus Estimate for current-quarter earnings has remained unchanged at 10 cents. The stock currently has a Zacks Rank #3.
Sydney, Australia-based Atlassian Corporation PLC is engaged in designing, developing, licensing and maintaining of software and the provisioning of software hosting services. Over the past seven days, the Zacks Consensus Estimate for current-quarter earnings has declined from 19 cents to 16 cents. The stock currently has a Zacks Rank # 5 (Strong Sell).
Live Nation Entertainment, Inc. is a Beverly Hills, CA-based live entertainment company. Over the past 30 days, the Zacks Consensus Estimate for current-quarter earnings has remained unchanged at 39 cents per share. The stock currently has a Zacks Rank #4 (Sell).