5 Toxic Stocks To Disown Or Play Short For Profit

Successful investing hinges upon precise identification of overpriced toxic stocks and correctly priced ones. In reality, however, the overhyped stocks and the fairly priced stocks are intertwined in the market in such a way that it becomes very difficult to separate them. Investors who can identify the toxic stocks and abandon them at the right time are likely to gain.

Generally, toxic stocks are vulnerable to external shocks and are burdened with huge amount of debts. Also, the price of the toxic stocks is irrationally inflated. The unjustifiably high price of the toxic stocks is only transitory as the inherent value of these stocks is lower than the current blown up price.

The inflated price of the toxic stocks can be ascribed to either an irrational exuberance associated with them or some serious fundamental weakness. If you possess such stocks for a very long period of time, you are sure to see huge erosion in your wealth.

On the other hand, if you can find the toxic stocks accurately, you may gain by adopting 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, 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 17 toxic stocks that showed up on the screen:

Covanta Holding Corporation (NYSE:CVA) is a Morristown, NJ-based alternative energy company that provides waste and energy services in the U.S. and Canada. Over the past 30 days, its second quarter estimates have widened from a loss of 15 cents per share to a loss of 17 cents. The company has a Zacks Rank #5 (Strong Sell).

Live Nation Entertainment, Inc. (NYSE:LYV) is a Beverly Hills, CA-based live entertainment company. Over the past 30 days, its second-quarter 2017 estimates have declined 5.9% to 16 cents a share. The stock currently has a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Oklahoma City, OK-based Paycom Software, Inc. (NYSE:PAYC) is an internet software industry firm, which provides cloud-based human capital management software solutions. Over the last 30 days, quarterly estimates have remained unchanged at 13 cents per share. Currently, the company carries a Zacks Rank #3.

Salesforce.com, inc. (NYSE:CRM) is a San Francisco, CA-based computer software industry firm. Over the past one month period, its quarterly earnings estimates have remained unchanged at 9 cents a share. Currently, the company carries a Zacks Rank #3.

Malvern, PA-based USA Technologies, Inc. (NASDAQ:USAT) is a leader in the networking of distributed assets, wireless non-cash transactions, associated financial/network services and energy management. Over the past one month period, its quarterly earnings estimates have remained unchanged at a penny per share. Currently, the company carries a Zacks Rank #4 (Sell).

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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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