Distance Yourself From These 4 Toxic Stocks to Avoid Losses

One important criterion for successful investing is the accurate identification of overblown toxic stocks and the rightly priced ones. However, it is not easy to precisely distinguish these two categories of stocks. Investors who can figure out the toxic stocks correctly and dump them away at the right time are likely to gain at the end.

Overhyped toxic stocks are usually vulnerable to outside shocks and burdened with a huge amount of debt. Also, the price of toxic stocks is unreasonably inflated. However, the high price of the toxic stocks is only temporary as it is higher than its intrinsic value.

The unjustifiably high price of toxic stocks can be ascribed to either an irrational exuberance associated with them or some serious fundamental drawbacks associated with the stock. Owning such bloated stocks for an inordinate period can be corrosive to investors and may result in huge loss of wealth.

Investors may benefit from the correct identification of toxic stocks with the help of an investing strategy known as short selling. This strategy allows them 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, identifying toxic stocks and abandoning them at an accurate time is the key to protecting your portfolio from big losses. Icahn Enterprises IEP, MGM Resorts International MGM, Vestas Wind Systems VWDRY and iHeartMedia Inc. IHRT are a few such toxic stocks.

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 -5: Negative EPS estimate revision for this fiscal year and the next during the past 12 weeks points to analysts’ pessimism.

Zacks Rank more than #3 (Hold): We have not considered Buy/Hold rated stocks that generally outperform or are in line the market. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Say No to These Stocks

Here are four of the 18 toxic stocks that showed up on the screen:

Icahn Enterprises is a diversified holding company engaged in various businesses, including investment management, metals, real estate, and home fashion. The Zacks Consensus Estimate for the firm’s 2022 earnings per share have declined 63% to 38 cents over the past seven days. IEP has missed earnings estimates in three out of the last four quarters and topped on the other, with the average negative surprise being 415.4%. The company carries a Zacks Rank #5 (Strong Sell) and has a Value Score of D.

MGM Resorts is a holding company and primarily owns and operates casino resorts through wholly owned subsidiaries.The Zacks Consensus Estimate for the company’s 2022 earnings per share has declined 71.3% to $1.29 over the past 30 days. MGM Resorts missed earnings estimates in two out of the last four quarters for as many beats, with the average negative surprise being 52%. The company carries a Zacks Rank #5 and has a VGM Score of C.

Vestas Wind is engaged in the development, manufacture, sale, and maintenance of wind technology that uses the energy of the wind to generate electricity. The Zacks Consensus Estimate for the company’s 2022 loss per share has widened by 5 cents to 24 cents over the past 30 days. The bottom line implies a year-over-year deterioration of 442.8%. The consensus mark for Vestas Wind’s 2022 revenues also signals a year-over-year decline of 20%. The company carries a Zacks Rank #5 and has a VGM Score of D.

iHeartMedia is a media and entertainment company. It specializes in radio, digital, outdoor, mobile, live events, social and on-demand entertainment and information services for advertisers. The Zacks Consensus Estimate for the company’s 2022 loss per share has widened by 117.6% to $1.85 over the past seven days. The bottom line implies a year-over-year deterioration of 69.7%. The consensus mark for 2023 earnings has also moved south by 23 cents in the past seven days. IHRT currently carries 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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MGM Resorts International (MGM) : Free Stock Analysis Report
 
Icahn Enterprises L.P. (IEP) : Free Stock Analysis Report
 
Vestas Wind Systems AS (VWDRY) : Free Stock Analysis Report
 
iHeartMedia, Inc. (IHRT) : Free Stock Analysis Report
 
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