Precise identification of overpriced stocks and rightly priced stocks holds the key to successful investing. However, it is not easy to do so as the correctly priced stocks and the bubble stocks are deceptively intermixed in the market place. Investors who can figure out the overpriced toxic stocks and dump them at the right time are poised to benefit.
In general, toxic stocks are burdened with huge debts and are vulnerable to external shocks. Moreover, unreasonably inflated price of the toxic stocks can't sustain for a long time as the current price of these stocks is higher than their intrinsic value. These stocks are sure to result in losses for investors over time.
Inflated price of the toxic stocks can be ascribed to either an irrational exuberance associated with them or some serious fundamental lacuna. If you own such stocks for a longer period of time, you are likely to witness big erosion in your wealth.
However, if you can precisely spot 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 figuring out stocks with growth potential, identifying toxic stocks and discarding 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 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 13 toxic stocks that showed up on the screen:
Etsy, Inc.ETSY is a Brooklyn, NY-based Internet services company. It operates a marketplace to make, sell and buy goods online and offline worldwide. Over the last 30 days, its 2016 loss estimate has narrowed down from a loss of 8 cents per share to a loss of 7 cents. The company has a Zacks Rank #3.
Wilmington, DE-based Incyte CorporationINCY is a drug discovery company. Over the last 30 days, its fourth-quarter 2016 estimate declined 6.7% to 14 cents per share. Incyte carries a Zacks Rank #3. You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here .
Abercrombie & Fitch Co . ANF is a New Albany, OH-based specialty retailer. Over the past one-month period, its 2017 loss estimate has widened from a loss of 5 cents to a loss of 6 cents. The stock currently has a Zacks Rank #5 (Strong Sell).
Boston, MA-based, Vertex Pharmaceuticals IncorporatedVRTX is a bio-technology company. Over the past one-month period, the 2017 estimate declined 44.8% to 48 cents. The stock currently has a Zacks Rank #3.
Bottomline Technologies (de), Inc.EPAY is a Portsmouth, NH-based computer software company. Over the past one-month period, the 2017 estimate declined 26.3% to 28 cents per share. The stock currently has a Zacks Rank #4 (Sell).
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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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Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free reportBottomline Technologies, Inc. (EPAY): Free Stock Analysis ReportVertex Pharmaceuticals Incorporated (VRTX): Free Stock Analysis ReportIncyte Corporation (INCY): Free Stock Analysis ReportAbercrombie & Fitch Company (ANF): Free Stock Analysis ReportEtsy, Inc. (ETSY): Free Stock Analysis ReportTo read this article on Zacks.com click here.Zacks Investment Research