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Get Rid of These 5 Toxic Stocks or Sell Short for Profit

Investors possessing the skill to distinguish between overpriced toxic stocks and the fairly priced ones emerge winners at the end. However, identifying these two categories of stocks is not easy as these are intertwined in the market place in a complicated way. Investors who can precisely identify toxic stocks and discard them at the right time are most likely to benefit.

Usually, the overhyped toxic stocks are vulnerable to external shocks and are burdened with huge amount of debts. Moreover, the price of the toxic stocks is unreasonably inflated. The unrealistically high price of toxic stocks is only transitory in nature as the intrinsic value of the toxic stocks is lower than the current bloated price.

The overblown price of toxic stocks can be ascribed to either an irrational exuberance associated with them or some fundamental problems associated with the stock. Owning such stocks for a long stretch of time is detrimental for investors and may result in huge loss of wealth.

On the other side, investors may gain from the precise identification of toxic stocks with the aid 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, identifying toxic stocks and abandoning them at the right time is the key to guard 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 21 toxic stocks that showed up on the screen:

Wilmington, DE-based Incyte Corporation INCY is a drug discovery company. Over the past month, the Zacks Consensus Estimate for current quarter earnings rose 66.7% to 3 cents per share. Incyte carries a Zacks Rank #3. You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

Houston, TX-based Apache Corporation APA is engaged in exploration, development and production of natural gas, crude oil and natural gas liquids. Over the past month, the Zacks Consensus Estimate for the current quarter declined from a breakeven point to loss of 3 cents per share. The stock currently has a Zacks Rank #3.

Quincy, IL-based Titan International, Inc. TWI is engaged in manufacturing and sale of wheels, tires, wheel and tire assemblies, and undercarriage systems and components for off-highway vehicles. Over the past month, the Zacks Consensus Estimate for current quarter loss widened from 5 cents per share to 12 cents. The stock currently has a Zacks Rank #5 (Strong Sell).

Leawood, KS-based AMC Entertainment Holdings, Inc. AMC is engaged in the theatrical exhibition business. Over the past month, the Zacks Consensus Estimate for current quarter loss widened from 28 cents per share to 34 cents. The stock currently has a Zacks Rank #3.

Carbonite, Inc. CARB is a Boston, MA-based computer services company engaged in providing cloud backup and restore solutions to small and medium-sized businesses. Over the past month, the Zacks Consensus Estimate for current quarter earnings remained unchanged at 21 cents per share. The stock currently has a Zacks Rank #3.

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.

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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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Carbonite, Inc. (CARB): Free Stock Analysis Report
 
AMC Entertainment Holdings, Inc. (AMC): Free Stock Analysis Report
 
Titan International, Inc. (TWI): Free Stock Analysis Report
 
Incyte Corporation (INCY): Free Stock Analysis Report
 
Apache Corporation (APA): Free Stock Analysis Report
 
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