One key factor behind successful investing is the correct identification of overpriced and fairly priced stocks. In practice, overvalued stocks and the correctly priced ones are mingled in such a way that distinguishing them is a tough task for investors. However, investors who can identify the overhyped toxic stocks and discard them at the right time are the ones who stand to benefit.
Usually, toxic companies are vulnerable to external onslaughts and burdened with huge debts. Irrationally high price of the toxic stocks is short lived as their current price exceeds their inherent value and these stocks are bound to result in loss for investors over time.
Higher price of the toxic stocks can be ascribed to either an irrational exuberance associated with them or some serious fundamental drawbacks. If you own such stocks for a long period of time, you are bound to see a significant loss in your wealth.
If you can, however, accurately figure out the 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 identifying stocks with growth potential, pinpointing toxic stocks and dumping them at the right time is the key to safeguard 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 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.
Here are four of the 11 toxic stocks that showed up on the screen:
New Fortress Energy LLC NFE: This New-York-based integrated gas-to-power company currently carries a Zacks Rank #3. Over the past seven days, the consensus mark for the bottom line for 2020 has deteriorated to a loss of 9 cents per share from earnings of 13 cents.
Match Group MTCH: This online dating company, based in Texas, currently carries a Zacks Rank #4 (Sell). Over the past 30 days, its fiscal 2020 estimates have declined by 21 cents a share. The Zacks Consensus Estimate for 2020 earnings depicts a year-over-year decline of 44.2%.
Ryman Hospitality Properties, Inc. RHP: Ryman Hospitality is a Real Estate Investment Trust specializing in group-oriented, destination hotel assets in urban and resort markets. Over the past 30 days, the Zacks Consensus Estimate for 2020 loss has widened by 24 cents. Notably, the consensus mark indicates year-over-year fall of 129%. The company currently carries a Zacks Rank #5 (Strong Sell).
Welbilt, Inc. WBT: U.S.-based Welbilt designs, manufactures and supplies food and beverage equipment for the foodservice market. Over the past 30 days, its 2020 loss estimates have widened by 2 cents per share. Notably, the consensus mark indicates year-over-year fall of 108.8%.