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5 Toxic Stocks to Discard from Your Portfolio

Picking up undervalued stocks on a regular basis is one of the keys to investing success. Similarly, one should proactively get rid of toxic stocks to maximize portfolio returns. A toxic stock is basically the one which trades at a price not supported by its fundamental strength. The chance of crashing is high for such stocks.

Irrational exuberance associated with a stock may lead to overpricing. Also, there might be some serious weakness latent in the company. And if you own such stocks for an inordinate period, they could lead to massive erosion of your wealth.

On the other hand, if you can identify toxic stocks, you may gain in a bear market by resorting to an investing technique called short selling – in which one can sell a stock first and then purchase it when its price falls.

Naturally, short selling excels in bear markets, while it typically loses money in bull markets.

So, just like picking good stocks, identifying toxic stocks is also imperative in shielding one’s portfolio from massive losses or making profits by short selling them.

Screening Criteria

Here, is a winning strategy that will help you identify the over-hyped toxic stocks:

·        Most recent Debt/Equity Ratio greater than the median industry average: High debt/equity ratio implies high leverage. And 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 -10: NegativeEPS estimate revision for this fiscal year and next fiscal year during the past 12 weeks point to analysts’ pessimism.

·        Zacks Rank more than or equal to #3: We have not considered the Buy-rated stocks that generally outperform the market. 

Here are five of the 13 stocks that made it through the screen:

Global Eagle Entertainment Inc. (ENT)

Zayo Group Holdings, Inc. (ZAYO)

Noodles & Company (NDLS)

Regeneron Pharmaceuticals, Inc. (REGN)

ViaSat Inc. (VSAT)

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: http://www.zacks.com/performance.

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ZAYO GROUP HLDG (ZAYO): Free Stock Analysis Report
 
VIASAT INC (VSAT): Free Stock Analysis Report
 
REGENERON PHARM (REGN): Free Stock Analysis Report
 
NOODLES & CO (NDLS): Free Stock Analysis Report
 
GLOBAL EAGL ENT (ENT): Free Stock Analysis Report
 
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