Detoxify Your Portfolio by Dumping These 4 Stocks

There are always some stocks that illusively scale lofty heights in a given time period. Yet, 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 massive erosion of wealth.

Nonetheless, 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. Las Vegas Sands LVS, Caesars Entertainment CZR, Sendas Distribuidora ASAI and Hawaiian Holdings HA are a few such toxic stocks.

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 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 25 toxic stocks that showed up on the screen:

Las Vegas Sands: Las Vegas Sands is a leading international developer of multi-use integrated resorts, primarily operating in the United States and Asia. The company’s stretched balance sheet remains a major concern, especially amid the coronavirus crisis. As of Sep 30, 2021, LVS’ total debt and unrestricted cash balance amounted to $14.5 billion and $1.64 billion, respectively.

The Zacks Consensus Estimate for Las Vegas Sands’ 2022 EPS has been revised down by 18 cents over the past seven days. The stock missed earnings estimates in three of the trailing four quarters and beat on one occasion, with the average negative surprise being 32.2%. LVS currently carries a Zacks Rank #5 (Strong Sell).

Caesars Entertainment: Caesars Entertainment is a diversified gaming and hospitality company, with the primary source of revenues being generated through gaming operations that include mobile, online gaming and sports betting. At the end of third-quarter 2021, the company’s net debt was $13,292 million, representing a total debt-to-capital ratio of 0.75.

The Zacks Consensus Estimate for Caesars Entertainment’s 2022 EPS has been revised down by 18 cents over the past seven days. The stock missed earnings estimates in two of the trailing four quarters and beat the same twice, with the average negative surprise being 295.8%. CZR currently carries a Zacks Rank #4 (Sell).

Sendas Distribuidora: Sendas Distribuidora is engaged in the retail and wholesale of food as well as other products through its stores. The company’s total debt to capitalization stands at 77%. ASAI currently carries a Zacks Rank #4.

The Zacks Consensus Estimate for Sendas Distribuidora’s 2022 bottom line implies a year-over-year decline of 31.3%. The consensus mark for 2022 earnings has been revised downward by 2 cents per share over the past 60 days.

Hawaiian Holdings: Hawaiian Holdings, the parent of Hawaiian Airlines, is headquartered in Honolulu County. In fact, it is Hawaii's biggest airline and has been serving the islands for more than 85 years. HA currently carries a Zacks Rank #4.

The Zacks Consensus Estimate for Hawaiian Holdings’ 2022 EPS has moved south by 8 cents over the past seven days. HA’s total debt to capitalization ratio stands at 76%. The stock missed earnings estimates in two of the trailing four quarters for as many misses.

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
 
Las Vegas Sands Corp. (LVS) : Free Stock Analysis Report
 
Hawaiian Holdings, Inc. (HA) : Free Stock Analysis Report
 
Caesars Entertainment, Inc. (CZR) : Free Stock Analysis Report
 
Sendas Distribuidora S.A. Sponsored ADR (ASAI) : Free Stock Analysis Report
 
To read this article on Zacks.com click here.
 
Zacks Investment Research