Investment in a stock with valuation above its true potential is bound to translate to loss over time. Overvaluation implies that the current price of the stock is not justified by its business conditions and therefore, a decline in price is inevitable.
A stock becomes overpriced due to irrational exuberance associated with it or some serious weakness in the company fundamentals. As a result, owning these stocks could lead to erosion of wealth for an investor.
Investors who can identify toxic stocks can actually gain even in a bear market by resorting to an investing technique called short selling.
In short selling, one can sell an un-owned stock and then purchase it when the price falls. Naturally, short selling has excelled in bear markets, while it typically loses money in bull markets.
So, just like selecting good stocks, identifying toxic stocks is also crucial in shielding one’s portfolio from massive losses or making profit 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 17 stocks that made it through the screen:
Teligent, Inc. ( (NASDAQ:TLGT) )
BHP Billiton (LON:BLT) Limited ( (NYSE:BHP) )
LinkedIn Corporation ( (NYSE:LNKD) )
Zayo Group Holdings, Inc. ( (NYSE:ZAYO) )
Opko Health, Inc. ( (NYSE:OPK) )
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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
OPKO HEALTH INC (OPK): Free Stock Analysis Report
BHP BILLITN LTD (BHP): Free Stock Analysis Report
LINKEDIN CORP-A (LNKD): Free Stock Analysis Report
TELIGENT INC (TLGT): Free Stock Analysis Report
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