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4 Toxic Stocks That May Give You Sleepless Nights

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Successful investing calls for appropriate identification of overpriced stocks and correctly priced stocks. Yet, in practice, overhyped toxic stocks and fairly priced stocks are intermixed in the marketplace in such a way that it becomes difficult to distinguish between them. Investors who can correctly spot the overpriced stocks and shun them at the right time are the ones likely to make a profit.

Usually, toxic stocks are fraught with huge debt loads and are susceptible to external shocks. Also, the unjustifiably high price of the toxic stocks is short-lived as the intrinsic value of these stocks is less than their current price. Quite naturally, if you own such toxic stocks for a long period of time, you are sure to make a huge loss in your wealth.

Higher price of the toxic stocks can be attributed to either an irrational exuberance associated with them or some serious fundamental lacuna. If you own such stocks for long, you are likely to see a big loss in your wealth.

On the contrary, if you can accurately pinpoint the toxic stocks, you are likely to 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 picking up stocks with strong growth potential, pinpointing toxic stocks and abandoning them at the right time is the key to protect your portfolio from big losses or make profits by short selling them.

Screening Criteria

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 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 0: Negative EPS estimate revision for the current and 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 17 stocks that made it through the screen:

Manchester United Ltd. MANU: Manchester United owns and operates a professional sports team. Over the past 60 days, the Zacks Consensus Estimate for 2021 has deteriorated from earnings of a penny to loss of 31 cents per share. The bottom-line projection indicates a year-over-year plunge of 210%. The company currently has a Zacks Rank #5 (Strong Sell).

Las Vegas Sands LVS: Las Vegas Sands is a leading international developer of multi-use integrated resorts, primarily operating in the United States and Asia. The Zacks Consensus Estimate for 2021 loss has widened from 3 cents per share to 75 cents over the past 30 days. The company currently has a Zacks Rank #5.

Melco Resorts & Entertainment Limited MLCO: This Zacks Rank #5 company is a developer, owner and operator of casino gaming as well as entertainment casino resort facilities, primarily in Asia. The Zacks Consensus Estimate for 2021 loss has widened from 70 cents per share to 72 cents over the past 30 days.

Carrols Restaurant Group, Inc. TAST: This Zacks Rank #4 (Sell) company is the largest BURGER KING franchisee in the United States, with more than 800 restaurants. The Zacks Consensus Estimate for Carrols’ 2021 earnings has been revised 133% downward over the past 60 days.

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 back-testing software.

The Research Wizard is a great place to begin. It's easy to use. Everything is in plain language. And it's very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.

Click here to sign up for a free trial to the Research Wizard today.

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 athttps://www.zacks.com/performance


Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
 
Las Vegas Sands Corp. (LVS) : Free Stock Analysis Report
 
Carrols Restaurant Group, Inc. (TAST) : Free Stock Analysis Report
 
Manchester United Ltd. (MANU) : Free Stock Analysis Report
 
Melco Resorts & Entertainment Limited (MLCO) : Free Stock Analysis Report
 
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