Not all stocks that recently scaled lofty heights will be able to sustain their good show. In fact, some of these stocks, whose current value surpassed their actual potential, are bound to result in loss for investors over time.
No matter how the broader market is performing, stocks without sturdy fundamentals are toxic for your portfolio. Identifying such bloated stocks accurately and dumping them at the right time can protect your returns.
Overpricing of these toxic stocks can be ascribed to either an 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 rightly figure out 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 picking promising stocks, detecting toxic stocks and discarding them at the right time is crucial to shielding one’s portfolio from big losses or making profits by short selling them.
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 overvalued.
% Change in F (1) and F (2) Estimate (12 Weeks) less than 0: 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 the 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 15 stocks that made it through the screen:
The Trade Desk Inc. TTD: Headquartered in Ventura, CA, this programmatic-advertising specialist currently carries a Zacks Rank #4 (Sell). Over the past 30 days, its fiscal 2020 earnings per share estimates have declined from $3.73 to $3.51.
Sina Corporation SINA: Based in Shanghai, this China-based online media company currently carries a Zacks Rank #4. Over the past 60 days, its fiscal 2020 earnings estimates have declined from $2.77 to $2.17 per share.
Casella Waste Systems, Inc. CWST: The Vermont-based waste management company currently carries a Zacks Rank #4. Over the past 30 days, its fiscal 2020 earnings estimates have declined from 88 cents to 70 cents per share.
Cinemark Holdings Inc CNK: Headquartered in Texas, this movie theatre chain currently carries a Zacks Rank #3. Over the past 30 days, the Zacks Consensus Estimate has been revised from earnings of $1.86 per share to loss of 43 cents.
National Oilwell Varco, Inc. NOV: This Houston, TX based oilfield services provider currently carries a Zacks Rank #3. Over the past seven days, its fiscal 2020 earnings estimates have declined from 20 cents to 13 cents per share.
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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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National Oilwell Varco, Inc. (NOV) : Free Stock Analysis Report
Sina Corporation (SINA) : Free Stock Analysis Report
Casella Waste Systems, Inc. (CWST) : Free Stock Analysis Report
Cinemark Holdings Inc (CNK) : Free Stock Analysis Report
The Trade Desk Inc. (TTD) : Free Stock Analysis Report
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