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5 Toxic Stocks to Get Rid Of or Play Short

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Correct identification of the overpriced and fairly priced stocks makes investing foolproof. In reality, however, the overpriced stocks and the correctly priced stocks are mixed in such a manner that it becomes very difficult to pick the wheat from the chaff. Pinpointing the bloated toxic stocks on a regular basis and discarding them at the right time is one of the keys of successful investing.

Usually, toxic companies are characterized by high debt burdens. Also, these companies are susceptible to external shocks. Naturally, the high price of the toxic stocks is short-lived as the current price exceeds their inherent value. These toxic stocks are sure to result in loss for investors over time.

Higher prices of toxic stocks can be ascribed to either an irrational exuberance associated with them or some serious fundamental drawbacks. If you own such over-priced stocks for a long period of time, you are bound to see huge loss of wealth.

However, if you can accurately identify such 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, picking toxic stocks and abandoning them at the right time is the key to shield your portfolio from big losses or make profits by short selling them.

Screening Criteria

Here is a winning strategy that will help you identify overhyped 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. You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here .

Here are five of the 12 toxic stocks that showed up on the screen:

Abercrombie & Fitch Co.ANF is a New Albany, OH-based specialty retailer. Over the past one-month period, its current year estimate has widened from a profit of 1 cent to a loss of 5 cents. The stock currently has a Zacks Rank #5 (Strong Sell).

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 2017 estimate declined 35.7% to 9 cents a share. The company has a Zacks Rank #3.

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 2017 loss estimate has widened from a loss of 46 cents to a loss of 54 cents. Conns carries a Zacks Rank #3.

Covanta Holding CorporationCVA 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 2017 estimate has remained unchanged at 6 cents per share. The company has a Zacks Rank #3.

ConocoPhillipsCOP is a Houston, TX-based major global exploration and production company with operations and activities in 21 countries that include the U.S., Canada, the U.K./Norway, China, Australia, offshore Timor-Leste, Indonesia, Libya, Nigeria, Algeria, Russia and Qatar. Over the past 30 days, its 2016 loss estimate has widened from $2.74 per share to a loss of $2.78. The company has a Zacks Rank #3.

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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ConocoPhillips (COP): Free Stock Analysis Report

Abercrombie & Fitch Company (ANF): Free Stock Analysis Report

Conn's, Inc. (CONN): Free Stock Analysis Report

Covanta Holding Corporation (CVA): Free Stock Analysis Report

Etsy, Inc. (ETSY): Free Stock Analysis Report

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


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

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