Precise identification of rightly-priced stocks is the key to successful investing. However, in practice, overpriced toxic stocks and the correctly-priced stocks are intertwined in such a manner that it is difficult to distinguish between the two.
Generally overhyped toxic stocks are susceptible to outside shocks. Moreover, these stocks are loaded with a high level of debt. The price of these stocks is artificially inflated. Nonetheless, the higher price of toxic stocks is only short-lived as it is higher than its true intrinsic value.
Investors are likely to benefit from precise 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 accurately identifying toxic stocks and abandoning or short selling those at the right time is the key to safeguard your portfolio from big losses.
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 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 26 toxic stocks that showed up on the screen:
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 39 cents per share. The stock currently has a Zacks Rank #4 (Sell).
Vancouver, Canada-based First Majestic Silver Corp. AG is engaged in the production, development, exploration, and acquisition of silver mines in Mexico. Over the past 30 days, the Zacks Consensus Estimate for current-year earnings per share has remained unchanged at 1 cent. The stock currently has a Zacks Rank #3.
Sydney, Australia-based Atlassian Corporation PLC TEAM is engaged in designing, developing, licensing and maintaining of software and the provisioning of software hosting services. Over the past 30 days, the Zacks Consensus Estimate for current-quarter earnings has remained unchanged at 16 cents. The stock currently has a Zacks Rank # 3.
Frederick, MD-based U.S. Silica Holdings, Inc. SLCA 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 4 cents to 5 cents. The stock currently has a Zacks Rank #3.
