Successful investing calls for the appropriate identification of overpriced stocks and correctly priced stocks. However, in practice, overhyped toxic stocks and fairly priced stocks are intermixed in the marketplace in such a way that it becomes difficult to distinguish between them. Investors who can correctly spot overpriced stocks and shun them at the right time are the ones likely to make a profit.
Usually, toxic stocks are fraught with huge debt loads and susceptible to external shocks. Also, the unjustifiably high price of toxic stocks is short-lived as the intrinsic value of these stocks is less than their current price. Quite naturally, if you own such toxic stocks for a long period of time, you are sure to incur a huge loss of wealth.
MGM Resorts International
MGM
,
Illumina Inc
ILMN
,
Omnicell, Inc.
OMCL
,
Hecla Mining
HL
and
RadNet, Inc.
RDNT
are a few such toxic stocks.
The higher price of the toxic stocks can be attributed to either an irrational exuberance associated with them or some serious fundamental lacuna associated with them. If you own such stocks for long, you are likely to see a big loss in your wealth.
On the other hand, if you can accurately pinpoint the toxic stocks, you are likely to gain by resorting to 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, just like picking up stocks with strong growth potential, pinpointing toxic stocks and abandoning them at the right time is the key to protect your portfolio from big losses or make profits 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 fiscal year and the next during the past 12 weeks points to analysts’ pessimism.
Zacks Rank more than #3 (Hold):
We have not considered Buy/Hold-rated stocks that generally outperform or are in line with the market. You can see
the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here
.
Stocks to Discard
Here are five of the 23 toxic stocks that showed up on the screen:
MGM Resorts
is a holding company and primarily owns and operates casino resorts through wholly owned subsidiaries. The Zacks Consensus Estimate for the company’s 2023 earnings implies a decline of 81.1% year over year. The consensus mark for 2022 EPS has been revised downward by 62.2% in the past 90 days. MGM Resorts missed earnings estimates in two out of the last four quarters for as many beats, with the average negative surprise being 52%. The company carries a Zacks Rank #5 (Strong Sell) and has a VGM Score of C.
Illumina
is a life sciences company that provides tools and integrated systems for the analysis of genetic variation and function. The Zacks Consensus Estimate for Illumina’s 2022 earnings per share implies a year-over-year decline of 59%. The consensus mark for 2023 EPS has moved south by 40 cents over the past 60 days. Estimates for ILMN’s 2022 earnings have also moved south by 32 cents per share over the same time frame. The stock currently carries a Zacks Rank #5 and has a VGM Score of F.
Omnicell
develops and markets end-to-end automation solutions for the medication-use process. The Zacks Consensus Estimate for Omnicell’s 2022 earnings per share implies a year-over-year decline of 28%. The consensus mark for 2022 EPS has moved south by 28 cents over the past 60 days. Estimates for OMCL’s 2023 earnings have also moved south by 32 cents per share over the past 30 days. The Zacks Consensus Estimate for the company’s 2023 earnings per share implies a year-over-year decline of 26%. The stock currently carries a Zacks Rank #5 and has a VGM Score of F.
Helca
is a leading low-cost U.S. silver producer with operating mines in Alaska and Idaho, and is a growing gold producer with an operating mine in Quebec, Canada. The Zacks Consensus Estimate for the 2022 bottom line is pegged at a loss of a penny a share, implying a year-over-year deterioration of 107.1%. The Zacks Consensus Estimate for 2022 sales implies a year-over-year decline of 11.3%. The consensus mark for 2023 EPS estimates has been revised downward by 15 cents in the past 60 days. The stock currently carries a Zacks Rank #4 (Sell) and has a VGM Score of F.
RadNet
provides high-quality, cost-effective diagnostic imaging services through a network of fully-owned and operated outpatient imaging centers. The Zacks Consensus Estimate for RadNet’s 2022 earnings per share implies a year-over-year decline of 52%. The consensus mark for 2023 EPS has moved south by 20 cents over the past 60 days. RDNT missed earnings estimates in three of the trailing four quarters and surpassed on the other occasion, with the average negative surprise being 131.3%. The stock currently carries a Zacks Rank #4 and has a VGM Score of C.
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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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