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Discard These 5 Toxic Stocks Now to Protect Your Portfolio


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Investing in a stock whose current price is not rationally justified by its true potential is sure to result in loss over time. Identifying such bloated stocks accurately and dumping them at the right time can protect your portfolio.

Overpricing of these toxic stocks can be attributed to either an irrational exuberance associated with them or some serious drawbacks.  And if you own such stocks for an inordinate period of time, you are likely to see significant erosion of your wealth.

However, if you can correctly detect such toxic stocks, you may gain in a bear market by resorting to an investing strategy called short selling. This strategy allows one to sell a stock first and then buy it when the price falls.

Naturally, short selling excels in bear markets, while it typically loses money in bull markets.

So, just like identifying promising stocks, detecting toxic stocks and dumping them at the right time is crucial to safeguarding one's portfolio from big losses or earning profits by short selling them.

Screening Criteria

Here is a winning strategy that will help you identify the over-hyped toxic stocks:

Most recent Debt/Equity Ratio greater than the median industry average : High debt/equity ratio implies high leverage. And 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 40 : 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 : NegativeEPS estimate revision for this and the next fiscal year during the past 12 weeks point to analysts' pessimism.

Zacks Rank more than or equal to #3 : We have not considered Buy-rated stocks that generally outperform the market.

Here are 5 of the 16 stocks that made it through the screen:

The Woodlands, TX-based Conns Inc. CONN is a specialty retailer which currently operates retail locations in Texas and Louisiana. Over the last 30 days, its current quarter estimate has remained unchanged at a loss of 2 cents per share. Conns carries a Zacks Rank #5 (Strong Sell).

Pleasanton, CA-based ZELTIQ Aesthetics, Inc. ZLTQ is a medical technology company. Over the past 30 days, its current quarter estimate has remained unchanged at a loss of 7 cents per share.  The company has a Zacks Rank #4 (Sell).

PTC Inc. PTC is a Needham, MA-based software company engaged in developing, marketing and supporting software solutions. Over the past one-month period, the current quarter earnings estimate has declined around 19.4% to 29 cents. The stock currently has a Zacks Rank #5.

Glendale, CA-based, DreamWorks Animation SKG Inc. DWA is engaged in developing and producing computer generated animated feature films for a broad movie-going audience. Over the past one-month period, current quarter earnings estimate has widened from a loss of 2 cents per share to a loss of 5 cents. The stock currently has a Zacks Rank #4.

Covanta Holding Corporation CVA is a Morristown, NJ-based alternative energy company which provides waste and energy services in the U.S. and Canada. Over the past 30 days, its current quarter estimate has remained unchanged at a loss of 15 cents per share.  The company has a Zacks Rank #3 (Hold).

Get the rest of the stocks on the list and start putting this and other ideas to the test. It can all be done with the Research Wizard stock picking and backtesting software.

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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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PTC INC (PTC): Free Stock Analysis Report

CONNS INC (CONN): Free Stock Analysis Report

COVANTA HOLDING (CVA): Free Stock Analysis Report

DREAMWORKS ANIM (DWA): Free Stock Analysis Report

ZELTIQ AESTHETC (ZLTQ): Free Stock Analysis Report

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Zacks Investment Research

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.



This article appears in: Business , Investing , Stocks
Referenced Symbols: PTC , CONN , CVA ,



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