There are always some stocks, which illusively scale lofty heights in a given time period. However, the good show doesn’t last for these overblown toxic stocks as their current price is not justified by their fundamental strength.
Toxic companies are usually characterized by huge debt loads and are vulnerable to external shocks. Accurately identifying such bloated stocks and getting rid of them at the right time can protect your portfolio.
Overpricing of these toxic stocks can be attributed to either an irrational enthusiasm surrounding them or some serious fundamental drawbacks. If you own such bubble stocks for an inordinate period of time, you are bound to see a massive erosion of wealth.
However, if you can precisely spot such toxic stocks, you may gain 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 identifying stocks with growth potential, pinpointing toxic stocks and offloading them at the right time is crucial to guard one’s portfolio from big losses or make profits by short selling them. Heska Corporation HSKA, Tandem Diabetes Care, Inc. TNDM, Credit Suisse Group CS,Zalando SE ZLNDY and Las Vegas Sands LVS are a few such toxic stocks.
Here is a winning strategy that will help you to identify overhyped 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 the current 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 the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Here are five of the 20 stocks that made it through the screen:
Colorado-based Heska sells advanced veterinary diagnostic and specialty products, primarily focused on canine and feline healthcare markets. The company currently carries a Zacks Rank #5 (Strong Sell) and has a VGM Score of F. The Zacks Consensus Estimate for HSKA’s 2022 bottom line implies a year-over-year decline of 10.6%. The consensus mark has moved south by 22 cents over the past seven days.
Headquartered in California, Tandem Diabetes designs, develops and markets products for people with insulin-dependent diabetes. The company currently carries a Zacks Rank #5 and has a VGM Score of D. The Zacks Consensus Estimate for TNDM’s 2022 bottom line implies a year-over-year plunge of 161.5%. The consensus mark has deteriorated from earnings of 35 cents a share to a loss of 16 cents over the past seven days.
Based in Switzerland, Credit Suisse offers investment products, private banking and financial advisory services, as well as insurance and pension solutions. The company currently carries a Zacks Rank #5 and has a VGM Score of C. The Zacks Consensus Estimate for CS’s 2022 bottom line implies a year-over-year slump of 666.7%. The consensus mark has deteriorated from earnings of 11 cents a share to a loss of 69 cents over the past 30 days.
Headquartered in Berlin, Zalando is an online fashion retailer offering clothing, sports products, shoes, bags and other accessories for men, women and children. The company currently carries a Zacks Rank #4 (Sell) and has a VGM Score of F. The Zacks Consensus Estimate for ZLNDY’s 2022 earnings implies a year-over-year decline of 73%. The consensus mark has moved south by 25 cents in the past 60 days.
Las Vegas Sands is an international developer of multi-use integrated resorts, primarily operating in the United States and Asia. Based in Las Vegas, LVS carries a Zacks Rank #4 and has a VGM Score of F. The Zacks Consensus Estimate for Las Vegas’ 2022 bottom line is pegged at a loss of $1.10 a share. The consensus mark of loss per share has widened from 89 cents to $1.10 in the past 30 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 backtesting 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 at: https://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
Credit Suisse Group (CS) : Free Stock Analysis Report
Las Vegas Sands Corp. (LVS) : Free Stock Analysis Report
Heska Corporation (HSKA) : Free Stock Analysis Report
Tandem Diabetes Care, Inc. (TNDM) : Free Stock Analysis Report
Zalando (ZLNDY) : Free Stock Analysis Report
To read this article on Zacks.com click here.
Zacks Investment Research