Successful investing is largely dependent on the correct identification of overpriced stocks. However, the overblown toxic stocks and the fairly priced stocks are intermixed in the marketplace in such a way that it becomes very difficult to identify them. Investors who can spot the overpriced stocks and abandon them at the right time are the ones likely to benefit.
Toxic stocks are usually vulnerable to external shocks and loaded with a huge debt burden. In fact, the unjustifiably high price of the toxic stocks is short-lived as the intrinsic value of these stocks is lower than their current price. So, quite naturally, if you own such toxic stocks for a very long period of time, you are sure to see huge erosion in your wealth.
High price of the toxic stocks can be either due to an irrational exuberance associated with them or some serious fundamental drawbacks. If you own such stocks for a long period of time, you are sure to see a big loss in your wealth.
However, if you can, precisely figure out 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 picking stocks with growth potential, pinpointing 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 24 toxic stocks that showed up on the screen:
Covanta Holding CorporationCVA is a Morristown, NJ-based alternative energy company that provides waste and energy services in the U.S. and Canada. Over the past 30 days, its current quarter estimates widened from a loss of 11 cents per share to a loss of 15 cents. The company has a Zacks Rank #3. You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here .
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 estimates declined 26.1% to 17 cents. The stock currently has a Zacks Rank #3.
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 current quarter estimate remained unchanged at a break-even point. The company has a Zacks Rank #3.
KCG Holdings, Inc.KCG is a Jersey City, NJ-based securities firm. Over the past one-month period, the current quarter estimates declined 47.1% to 9 cents. KCG Holdings carries a Zacks Rank #4 (Sell).
Wilmington, DE-based Incyte CorporationINCY is a drug discovery company. Over the last 30 days, its current quarter estimate widened from a loss of 83 cents a share to a loss of 96 cents. Incyte carries a Zacks Rank #4.
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.
The Research Wizard is a great place to begin. It's easy to use. Everything is in plain language. And it's very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.
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 .
Zacks Restaurant Recommendations : In addition to dining at these special places, you can feast on their stock shares. A Zacks Special Report spotlights 5 recent IPOs to watch plus 2 stocks that offer immediate promise in a booming sector. Download it free »
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.