Accurate identification of overpriced stocks and correctly priced stocks is the key to investing success. However, it is a tough task to differentiate between a fairly priced stock and an overhyped stock in a complicated market place. Investors who can spot exorbitantly priced toxic stocks and abandon them at the right time are likely to maximize portfolio returns.
Toxic stocks are usually characterized by a high debt burden and are vulnerable to external shocks. Also, there might be some serious weakness latent in the company. The unjustifiably high price of toxic stocks does not last long as the current price of these stocks exceeds their intrinsic values. Owning such stocks for a prolonged period could lead to massive erosion of wealth.
However, if you can figure out the toxic stocks precisely, you may benefit by resorting to an investing strategy called short selling—– in which one can sell a stock first and then purchase it when its price falls. While short selling excels in bear markets, it typically loses money in bull markets.
So, just like picking stocks with huge growth potential, figuring out toxic stocks and abandoning them at the right time is the key to shield 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 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 the Buy-rated stocks that generally outperform the market.
Here are five of the 20 stocks that made it through the screen:
Envestnet, Inc ENV: This financial technology firm, based in Chicago, currently carries a Zacks Rank #5 (Sell). Over the past 30 days, its fiscal 2020 earnings estimates have declined by 28 cents a share.
First Majestic Silver Corp. AG:This Canada-based firm engaged in the development and exploration of silver mines, currently carries a Zacks Rank #5. Over the past 30 days, its fiscal 2020 earnings estimates have declined by 13 cents a share.
Myriad Genetics, Inc. MYGN: The molecular diagnostics company, based in Utah, currently carries a Zacks Rank #4 (Sell). Over the past 30 days, its fiscal 2020 earnings estimates have declined by 62 cents a share.
Vericel Corporation VCEL: The regenerative medicine company, based in Massachusetts, currently carries a Zacks Rank #4. Over the past 30 days, its fiscal 2020 earnings estimates have declined by 23 cents a share.
Casella Waste Systems CWST:ThisVermont-based provider of vertically integrated solid waste services currently carries a Zacks Rank #4. Over the past 30 days, its fiscal 2020 earnings estimates have declined by 13 cents a share.