Accurate identification of correctly priced stocks is the key to successful investing. But, in reality, overpriced toxic stocks and rightly priced stocks are intertwined in such a way that it is not an easy task to differentiate them.
Usually, overblown toxic stocks are vulnerable to external shocks. Also, these stocks are loaded with a high level of debt. The price of these stocks is artificially inflated. However, the higher price of toxic stocks is only short-lived in nature as it is higher than its true intrinsic value.
Investors may profit 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, accurately pinpointing 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 four of the 15 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 has remained unchanged at a loss of 10 cents per share. The company currently has a Zacks Rank #4 (Sell).
Live Nation Entertainment, Inc. LYV 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 19 cents per share. The stock currently has a Zacks Rank #3.
McLean, VA-based GTT Communications, Inc. GTT is a cloud networking services company. Over the past 30 days, the Zacks Consensus Estimate for current-quarter loss has widened from 11 cents per share to 17 cents. The stock currently has a Zacks Rank #3.
Duluth, GA-based National Vision Holdings, Inc. EYE operates as an optical retailer. In the past 30 days, the Zacks Consensus Estimate for the current quarter has remained unchanged at 17 cents per share. The company currently has a Zacks Rank #3.
GTT Communications, Inc. (GTT): Free Stock Analysis Report
Live Nation Entertainment, Inc. (LYV): Free Stock Analysis Report
Covanta Holding Corporation (CVA): Free Stock Analysis Report
National Vision Holdings, Inc. (EYE): Free Stock Analysis Report
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