Dispose Of These 5 Toxic Stocks Or Sell Short For Gains

One of the keys to successful investing is precise identification of overhyped toxic stocks and the correctly priced ones. But it is not easy to accurately distinguish between these two types of stocks. Investors who can correctly spot the toxic stocks and get rid of them at the right time are likely to benefit at the end.

Usually, overblown toxic stocks are susceptible to external shocks and are loaded with hefty amount of debts. Also, the price of the toxic stocks is unjustifiably high. The high price of toxic stocks is only short-lived as the current bloated price of the toxic stocks is higher than its intrinsic value.

The exorbitant price of toxic stocks can be due to either an irrational exuberance associated with them or some fundamental drawbacks associated with the stock. Owning such stocks for a long stretch of time can be detrimental to investors 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 known as short selling. This strategy allows them 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, picking up 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 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 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 Buy-rated stocks that generally outperform the market.

Here are five of the 25 toxic stocks that showed up on the screen:

Wilmington, DE-based Incyte Corporation (NASDAQ:INCY) is a drug discovery company. Over the past month, the Zacks Consensus Estimate for current quarter loss rose from 47 cents per share to 51 cents. Incyte carries a Zacks Rank #3. You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

Leawood, KS-based AMC Entertainment Holdings, Inc. (NYSE:AMC) is engaged in the theatrical exhibition business. Over the past month, the Zacks Consensus Estimate for current quarter earnings declined from 34 cents per share to 32 cents. The stock currently has a Zacks Rank #3.

Buenos Aires, Argentina-based Mercadolibre, Inc. (NASDAQ:MELI) is a leading online trading platform in Latin America. Over the past month, the Zacks Consensus Estimate for current quarter earnings remained unchanged at 58 cents. The stock currently has a Zacks Rank #5 (Strong Sell).

PTC Inc. (NASDAQ:PTC) is a Needham, MA-based software company engaged in developing, marketing and supporting software solutions. Over the past month, the Zacks Consensus Estimate for current quarter earnings declined from 31 cents per share to 30 cents. The stock currently has a Zacks Rank #3.

Norwell, MA-based Clean Harbors, Inc. (NYSE:CLH) is a leading provider of environmental, energy and industrial services in North America. Over the past month, the Zacks Consensus Estimate for the current quarter has remained unchanged at 6 cents per share. The stock currently has a Zacks Rank #5.

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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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