Successful investing hinges on accurate identification of overblown toxic stocks and the rightly priced ones. However, precisely spotting toxic stocks and discarding them at the right time to make some gains at the end is not a simple task.
Overhyped toxic stocks are generally vulnerable to external shocks and burdened with a huge amount of debt. Also, the price of toxic stocks is unreasonably high. However, the high price of the toxic stocks is only temporary as it is higher than its intrinsic value.
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, picking up toxic stocks and abandoning them at the right time is the key to guard your portfolio from big losses. Profits can be made by short selling them.
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 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 four of the 29 toxic stocks that showed up on the screen:
Las Vegas Sands
LVS
: Based in Las Vegas, Las Vegas Sands is a leading international developer of multi-use integrated resorts, primarily operating in the United States and Asia. Coronavirus woes has badly affected the stock. Also, maintaining liquidity amid the pandemic has become a herculean task for the company, which is burdened with high debt. The stock currently carries a Zacks Rank #4 (Sell) and has a
VGM Score
of D. The Zacks Consensus Estimate for the bottom line for 2021 has deteriorated from earnings of 35 cents per share to a loss of 2 cents over the past 30 days.
Shift4 Payments
FOUR
: This Allentown-based company is a provider of integrated payment processing and technology solutions. Earlier this month, it reported weaker-than-expected first-quarter earnings and revenues. Investors are all the more concerned about the firm’s high valuation after disappointing quarterly results. The stock currently carries a Zacks Rank #5 (Strong Sell) and has a VGM Score of D. The Zacks Consensus Estimate for 2021 earnings per share has been revised downward by 6 cents over the past 30 days.
Twitter
TWTR
: This popular social media platform that connects users to a network of people, news, ideas, opinions and information currently carries a Zacks Rank #4 and has a VGM Score of C. Increasing competition for ad dollars, lack of revenue diversification, higher expenses related to product development and increasing social media regulations are major headwinds surrounding the firm. In the last reported quarter, Twitter’s monetizable daily active users came in slightly short of expectations and Q2 sales guidance was rather underwhelming. The Zacks Consensus Estimate for 2021 earnings per share has been revised downward by 11 cents over the past 30 days.
Yandex
YNDX
: Moscow-based Yandex — carrying a Zacks Rank #5 and a VGM Score of F — is an Internet-based company that develops technology products and services by leveraging the power of machine learning. This Russian search engine faces headwinds from the lack of diversification of revenues and operations as well as stiff competition. Operating primarily in Russia, its financial and operating activities are exposed to economic conditions of the country. Also, if the company plans to expand globally, it will face a tough competition from Google, which already poses a stiff challenge in Russia. The Zacks Consensus Estimate for 2021 earnings per share has been revised downward by 29 cents over the past 60 days.
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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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