Owning a toxic stock whose current price is not supported by its fundamental strength is sure to result in loss over time. Toxic companies are usually characterized by huge debt burdens and are vulnerable to external shocks. Spotting these overvalued stocks and unloading them at the right time is the key to a successful investment strategy.
Overpricing of toxic stocks may be ascribed to the irrational exuberance associated with them or some serious fundamental lacunae. If you own such stocks for an inordinate period of time, they could cause massive damage to your wealth.
However, if you can pinpoint 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 purchase it when its price falls. Naturally, short selling excels in bear markets, while it typically loses money in bull markets.
So, just like identifying stocks, picking up toxic stocks is also crucial to shield one’s portfolio from huge losses or making profit by short selling them.
Here is a winning strategy that will help you identify overpriced toxic stocks:
Most recent Debt/Equity Ratio greater than the median industry average: High debt/equity ratio implies increased 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 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 four of the 40 toxic stocks that showed up on the screen:
Ferrari N.V. RACE: This Italy-based automaker currently carries a Zacks Rank #4 (Sell). Over the past 30 days, its 2020 earnings estimates have declined by 25 cents. The consensus mark for 2020 earnings is pegged at $2.98 a share, suggesting a year-over-year decline of 28.4%.
Myriad Genetics, Inc. MYGN: This molecular diagnostics company, based in Utah, currently carries a Zacks Rank #4. Over the past 30 days, its fiscal 2020 estimates have declined by 21 cents a share. The Zacks Consensus Estimate is pegged at a loss of 13 cents a share, depicting a year-over-year drop of 107.8%.
Burlington Stores, Inc. BURL: Headquartered in New Jersey, this Zacks Rank #3 company functions as a retailer of branded apparel products. Over the past 30 days, the Zacks Consensus Estimate for fiscal 2021 has deteriorated to a loss of $1.10 per share from earnings of $3.16. Notably, the consensus mark indicates year-over-year fall of 114.8%.
Schlumberger Limited SLB: Based in Texas, this leading oilfield services company carries a Zacks Rank #3. Over the past 60 days, its 2020 earnings estimates have declined by 66 cents. The consensus mark for 2020 earnings is pegged at 15 cents a share, suggesting a year-over-year decline of 89.8%.
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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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Schlumberger Limited (SLB) : Free Stock Analysis Report
Myriad Genetics, Inc. (MYGN) : Free Stock Analysis Report
Burlington Stores, Inc. (BURL) : Free Stock Analysis Report
Ferrari N.V. (RACE) : Free Stock Analysis Report
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