5 Toxic Stocks To Stay Away From Or Sell Short
Zacks Investment Research | Oct 02, 2016 09:08PM ET
There are always some stocks which experience irrationally high price levels at a given time period. For these stocks, the current bloated price is higher than their intrinsic value. The good show of the toxic stocks does not last long and these are bound to result into loss for investors over time.
Usually, toxic companies are characterized by huge debt loads and are vulnerable to external shocks. Accurately figuring such overblown stocks and getting rid of them at the right time can protect your portfolio.
Overpricing of these toxic stocks is either due to irrational exuberance associated with them or some serious fundamental drawbacks. And if you own such stocks for a long period of time, you are likely to see significant erosion of your wealth.
However, if you can correctly identify 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.
While short selling excels in bear markets, it typically loses money in bull markets.
So, just like selecting promising stocks, finding out toxic stocks and dumping them at the right time is crucial to safeguard one’s portfolio from big losses or making profits by short selling them.
Screening Criteria
Here is a winning strategy that will help you identify the overhyped 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 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 point to analysts’ pessimism.
Zacks Rank more than or equal to #3: We have not considered Buy-rated stocks that generally outperform the market. You can see Zacks Investment Research
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