Investors who can precisely differentiate between overpriced stocks and fairly priced stocks emerge winners. However, in this complicated marketplace, these two types of stocks are intertwined in such a way that it is very tough to identify them. Investors who can pick the toxic stocks appropriately and abandon them at the right time are likely to benefit.
Generally, the overblown toxic stocks are susceptible to outside shocks and are loaded with high levels of debts. Also, prices of the toxic stocks are unrealistically high. The irrationally inflated price of the toxic stocks is only short-lived in nature as their intrinsic value falls short of the current hyped price.
The overhyped price of toxic stocks can be attributed to either an irrational exuberance associated with them or some fundamental drawbacks related to the stock. Owning such stocks for a long period of time is detrimental and may result in huge erosion of wealth.
Investors may gain from the accurate identification of toxic stocks with the help of 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, figuring out toxic stocks and discarding them at the right time is the key to protect your portfolio from big losses. Profits can be made 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 increased 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
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Here are four of the 17 toxic stocks that showed up on the screen:
Vail Resorts, Inc.
MTN
: This Colorado-based ski resort operator currently carries a Zacks Rank #5 (Strong Sell). The coronavirus pandemic continues to negatively impact Vail Resort’s operations and the firm is likely to delay its entry into new markets due to the ongoing crisis. It anticipates fourth-quarter fiscal 2020 results to be negatively impacted by muted travel environment and dismal visitation to the company’s resort properties. The Zacks Consensus Estimate for fiscal 2020 earnings suggests a year-over-year decline of 65.4%. Over the past 30 days, its fiscal 2021 earnings estimates have declined by 91 cents a share.
Las Vegas Sands Corp.
LVS
: Headquartered in Las Vegas, this Zacks Rank #4 (Sell) company owns and operates casino resorts and convention centers. As the COVID-19 pandemic has hit the resort and casino business hard, the company has been going through challenging times. Gambling revenues in Macao have been on a decline amid low footfall. This is expected to dent the firm’s overall revenues. The Zacks Consensus Estimate for fiscal 2020 earnings suggests a year-over-year decline of 145.7%. Over the past 30 days, its fiscal 2021 earnings estimates have declined by 2 cents a share.
BioMarin Pharmaceutical Inc.
BMRN
: San Rafael, CA-based BioMarin focuses on the development and commercialization of treatments for serious life threatening medical conditions, mostly for children. Setbacks on the development and regulatory front remain concerns. The stock currently carries a Zacks Rank #4. Last month, the U.S. Food and Drug Administration rejected the company’s potentially game-changing hemophilia A gene therapy amid durability doubts. Over the past 60 days, the Zacks Consensus Estimate for fiscal 2020 and 2021 earnings per share has declined by 17 cents and $1.06, respectively.
Allegiant Travel
ALGT
:This Zacks Rank #4 leisure travel company offers flight transport, hotel booking, car rentals, travel management and other related services. The coronavirus pandemic is taking a toll on Allegiant. With air-travel demand for leisure spiraling down to an unprecedented level, the firm’s top and bottom lines are suffering. The Zacks Consensus Estimate for fiscal 2020 earnings suggests a year-over-year decline of 170.9%.Over the past 30 days, its fiscal 2020 loss estimates have widened by 40 cents a 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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