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Abandon These 5 Toxic Stocks or Sell Short for Profit

Zacks Equity Research

One important criterion for successful investing is accurate identification of overblown toxic stocks and the rightly priced ones. However, it is not easy to precisely distinguish these two categories of stocks. Investors who can figure out the toxic stocks correctly and throw them away at the right time are likely to gain at the end.  

Overhyped toxic stocks are usually vulnerable to outside shocks and burdened with a huge amount of debt. Also, the price of toxic stocks is unreasonably inflated. However, the high price of the toxic stocks is only temporary as  it is higher than its intrinsic value.

The unjustifiably high price of toxic stocks can be ascribed to either an irrational exuberance associated with them or some serious fundamental drawbacks associated with the stock. Owning such bloated stocks for an inordinate period of time can be corrosive to investors and may result in huge loss of wealth.

Investors may benefit from the correct identification of toxic stocks with the help of an investing strategy known as short selling. This strategy allows them 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, identifying toxic stocks and abandoning them at the accurate time is the key to protect your portfolio from big losses. Profits can be made by short selling them.

Screening Criteria

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 20 toxic stocks that showed up on the screen:

Covanta Holding Corporation 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 remained unchanged at 20 cents per share.  The company has a Zacks Rank #3. You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

Leawood, KS-based AMC Entertainment Holdings, Inc. AMC is engaged in the theatrical exhibition business. Over the past month, the Zacks Consensus Estimate for current quarter earnings remained unchanged at 32 cents per share. The stock currently has a Zacks Rank #3.

Wilmington, DE-based Incyte Corporation INCY is a drug discovery company. Over the past month, the Zacks Consensus Estimate for current quarter loss narrowed from 51 cents per share to 48 cents. Incyte carries a Zacks Rank #4 (Sell).

PTC Inc. PTC is a Needham, MA-based software company engaged in developing, marketing and supporting software solutions. In the past month, the Zacks Consensus Estimate for current quarter earnings remained unchanged at 30 cents. The stock currently has a Zacks Rank #3.

Tampa, FL-based Cott Corporation COT is a diversified beverage company. In the past month, the Zacks Consensus Estimate for current quarter earnings remained unchanged at 2 cents per share. 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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