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These 4 Toxic Stocks May Bring Bad Luck to Your Portfolio

Just like selecting good and undervalued stocks on a regular basis is one of the keys to investing success, identifying and proactively getting rid of toxic stocks is also crucial to maximizing portfolio returns.

A toxic stock is basically one that trades at a price not supported by its fundamental strength. Moreover, these stocks generally have a high level of debt. The price of these stocks is artificially inflated. Irrational exuberance associated with a stock may lead to overpricing. Owning such stocks for an inordinate period could lead to erosion of wealth for an investor.

However, if you can correctly identify the toxic stocks, you may also gain by resorting to an investment technique called short selling. In short selling, one can sell an unowned 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.

As such, identifying toxic stocks is also imperative in shielding one’s portfolio from massive losses or making profits by short selling them. Bally’s Corporation BALY, Omnicell, Inc. OMCL, Illumina Inc. ILMN and Atlantica Sustainable Infrastructure PLC AY are a few such toxic stocks.

Screening Criteria

Here is a winning strategy that will help you to identify overpriced toxic stocks:

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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 24 toxic stocks that showed up on the screen:

Bally’s is a gaming, hospitality and entertainment company that engages in casinos, resorts, and online gaming in the United States. The company offers interactive entertainment experiences through its traditional casino offerings as well as its online sportsbook, bingo, daily fantasy and iCasino. The Zacks Consensus Estimate for BALY’s 2023 bottom line is pegged at a loss of 2 cents per share, implying a year-over-year deterioration of 102%. The consensus mark has moved south from earnings of 15 cents per share to a loss of 2 cents per share over the past seven days. Bally’s missed earnings estimates in two out of the last four quarters for as many misses, with the average negative surprise being 29.5%. The company carries a Zacks Rank #5 (Strong Sell).

Omnicell develops and markets end-to-end automation solutions for the medication-use process. The economic environment caused health systems to implement capital budget freezes and additional budget approval processes, which resulted in elongated sales cycles. The increasing cost of production continues to hamper the company’s margin performance. Weak hospital spending trends and tough competition pose threats. The Zacks Consensus Estimate for Omnicell’s 2023 earnings per share implies a year-over-year decline of 26%. The consensus mark for 2023 EPS has moved south by 32 cents over the past 60 days. Omnicell missed earnings estimates in two out of the last four quarters for as many misses. The stock currently carries a Zacks Rank #5 and has a VGM Score of F.

Illumina is a life sciences company that provides tools and integrated systems for the analysis of genetic variation and function. A reduction in full-year 2022 adjusted EPS and sales guidance has dimmed investors’ confidence. For 2022, Illumina now expects consolidated revenues to be flat to up 1% year over year (down from the prior projection of growth of 4-5%). The company also lowered its adjusted EPS guidance for 2022 to the range of $2.35 to $2.50 (compared with the previous guidance of $2.75-$2.90). The Zacks Consensus Estimate for Illumina’s 2023 earnings per share has moved south by 17 cents over the past seven days. The stock currently carries a Zacks Rank #5 and has a VGM Score of F.

Atlantica Sustainable provides renewable energy solutions. The firm owns and operates natural gas fields, as well as offers transmission, transportation infrastructures and water assets solutions. Formerly known as Atlantica Yield plc, AY is based in Brentford, UK. Atlantica Sustainable has fallen short of earnings estimates in each of the last four quarters, with the average negative surprise being 99%. The Zacks Consensus Estimate for Atlantica Yield’s 2022 bottom line is pegged at a loss of 29 cents a share and implies a year-over-year deterioration of 11.5%. The consensus mark for 2023 earnings has moved south by a penny over the past seven days. AY currently carries a Zacks Rank #5 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.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

Omnicell, Inc. (OMCL) : Free Stock Analysis Report

Illumina, Inc. (ILMN) : Free Stock Analysis Report

Atlantica Sustainable Infrastructure PLC (AY) : Free Stock Analysis Report

Bally's Corporation (BALY) : Free Stock Analysis Report

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