Yahoo Finance 4 Toxic Stocks That Can Drag Down Your Portfolio Performance
Since the beginning of 2022, markets have been bearing the brunt of macroeconomic and geopolitical uncertainty. Rising interest rates and inflationary concerns are keeping investors on edge. The most important thing during bear markets is avoiding big errors. Regardless of your market approach to investing or trading, there is only one way to protect your portfolio from a large loss. Selling at a small loss before it snowballs into a large loss is the only way to ensure that a devastating drawdown does not occur within the context of a portfolio.
Considering the current market mood filled with ambiguity, it’s as important to get rid of fundamentally weak toxic stocks as it is to invest in attractively valued companies possessing fundamental strength.
Toxic companies are usually characterized by huge debt loads and are vulnerable to external shocks. These stocks might illusively scale lofty heights in a given time period, but the good show doesn’t last for these overblown toxic stocks, as their current price is not justified by their fundamental strength. Accurately identifying such bloated stocks and getting rid of them at the right time can protect your portfolio.
Overpricing of these toxic stocks can be attributed to either an irrational enthusiasm surrounding them or some serious fundamental drawbacks. If you own such bubble stocks for an inordinate period of time, you are bound to see massive erosion of wealth.
Nonetheless, if you can precisely spot such toxic stocks, you may gain by resorting to an investing strategy called short selling. This strategy allows one 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 identifying stocks with growth potential, pinpointing toxic stocks and offloading them at the right time is crucial to guard one’s portfolio against big losses or make profits by short selling them. Icahn Enterprises IEP, Vestas Wind Systems VWDRY, MGM Resorts International MGM and DASAN Zhone Solutions, Inc DZSI are a few such toxic stocks.
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 a 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.
Here are four of the 19 toxic stocks that showed up on the screen:
Icahn Enterprises is a diversified holding company engaged in various businesses, including investment management, metals, real estate and home fashion. The Zacks Consensus Estimate for the firm’s 2022 earnings per share has declined 63% to 38 cents over the past 60 days. IEP missed earnings estimates in three out of the last four quarters and topped in the other, with the average negative surprise being 415.4%. The company carries a Zacks Rank #5 (Strong Sell) and has a Value Score of D.
Vestas Wind is engaged in the development, manufacture, sale and maintenance of wind technology that uses the energy of the wind to generate electricity. The Zacks Consensus Estimate for the company’s 2022 loss per share has widened by 3 cents to 27 cents over the past 30 days. The bottom line implies a year-over-year deterioration of 485.7%. The consensus mark for Vestas Wind’s 2022 revenues also signals a year-over-year decline of 18.3%. The company carries a Zacks Rank #5 and has a VGM Score of D.
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 2022 earnings per share has declined 71.4% to $1.29 over the past 60 days. MGM’s 2023 bottom-line estimates imply a decline of 81.2% year over year. 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 #4 and has a VGM Score of D.
DASAN Zhone offers network access solutions and communications platforms for service providers and enterprise networks in the United States, Canada and many other countries. The Zacks Consensus Estimate for DZSI’s 2022 earnings per share implies a year-over-year decline of 33.3%. The consensus mark for 2022 EPS has moved south by 13 cents a share to 18 cents over the past 60 days. DZSI missed earnings estimates in three out of the last four quarters and topped in the other, with the average negative surprise being 15.1%. The company carries a Zacks Rank #4 (Sell) and has a VGM Score of F.
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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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MGM Resorts International (MGM) : Free Stock Analysis Report
Icahn Enterprises L.P. (IEP) : Free Stock Analysis Report
Vestas Wind Systems AS (VWDRY) : Free Stock Analysis Report
DZS Inc. (DZSI) : Free Stock Analysis Report
