Yahoo Finance Discard These 4 Toxic Stocks to Enhance Portfolio Performance
Toxic stocks, as the name suggests, are not suitable for your portfolio. These appear lucrative at first, mostly because of their popularity, but turn out to be risky eventually. The risk of owning toxic stocks can be prevented if investors remain vigilant about the performance of every stock that they own in their portfolios.
Let’s first understand how to identify toxic stocks. The performance of a stock mainly depends on the performance of the underlying company, which, in turn, is subject to the company’s financial flexibility, its legal standing and management's decisions.
Most companies issue debt to raise money to grow their businesses. But the problem begins when those companies are unable to generate enough profits to pay off their liabilities. Stock prices of such insolvent companies get wiped out within a few days or even within few hours.
By careful examination of a company’s financial statements, its actual performance can be gauged. The intrinsic value of a company under distress is usually lower than its stock price. Such a stock becomes overvalued and is prone to losing its value over time. This is the time when investors should pull out of such risky investments.
The stock price of a company also depends on management’s decision and legal challenges that it faces. If management is inexperienced or has a track record of making poor decisions, the company’s future and ultimately the performance of the stock are bound to go downhill. Investors can prevent themselves from such risks by keeping abreast of the latest news on the company.
At some instances, investors may fail to identify toxic stocks despite meticulously studying financial statements because of misleading information. In such cases, diversification can prove out to be a savior. Accumulating stocks from different sectors with low correlation is a key to diversification. A well-diversified portfolio is least likely to suffer from the adverse outcome of a toxic stock present in the portfolio.
Detection and removal of toxic stocks is a pathway to a healthy portfolio. If investors can successfully identify a toxic stock in their portfolio, they can short-sell it and buy it again at a lower price to generate profits.
The Howard Hughes Corporation HHC, Vertex, Inc. VERX, TechTarget, Inc. TTGT and Pegasystems Inc. PEGA are a few toxic stocks that you should dump from your portfolio.
Screening Criteria
Here is a winning strategy that will help you to identify 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 21 toxic stocks that showed up on the screen:
Howard Hughes operates as a real estate company engaged in the development of master-planned communities and other strategic real estate development opportunities across the United States. The Zacks Consensus Estimate for HHC’s 2023 bottom line is pegged at a loss of $1.01 per share, implying a year-over-year deterioration of 127.67%. The consensus mark has moved south from earnings of 6 cents per share over the past 30 days. Howard Huges beat earnings estimates in three out of the last four quarters and missed once, with the average surprise being 53.14%. The company carries a Zacks Rank #4 (Sell) and has a VGM Score of F.
Vertex provides tax technology solutions for corporations in retail, leasing, communication and manufacturing industries, principally in the United States and internationally. The Zacks Consensus Estimate for VERX’s 2023 bottom line is pegged at a profit of 35 cents per share. The consensus mark has moved south from earnings of 37 cents per share to earnings of 35 cents per share over the past 30 days. Vertex beat earnings estimates in three of the four trailing quarters and met once, with the average surprise being 35.83%. The company carries a Zacks Rank #4 and has a VGM Score of D.
TECHTARGET is a leading online Information Technology media company, providing IT companies with ROI-focused marketing programs to generate leads, shorten sales cycles, and grow revenues. The Zacks Consensus Estimate for TTGT’s 2023 bottom line is pegged at a profit of $1.52 per share, implying a year-over-year deterioration of 40.63%. The Zacks Consensus Estimate for the firm’s 2023 earnings has moved south from $1.93 per share over the past 30 days. TECHTARGET beat earnings estimates in all four trailing quarters, with the average surprise being 11.17%. The company carries a Zacks Rank #4 and has a VGM Score of C.
Pegasystems is a leading provider of customer relationship management software that enables transaction-intensive organizations to manage a broad array of customer interactions. The Zacks Consensus Estimate for PEGA’s 2023 bottom line is pegged at a profit of $1.37 per share. The Zacks Consensus Estimate for the firm’s 2023 bottom line has moved south from earnings of $1.40 per share over the past 60 days. Pegasystems beat earnings estimates in one out of the four trailing quarters and missed thrice, with the average surprise being negative 105.47%. The company 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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Howard Hughes Corporation (The) (HHC) : Free Stock Analysis Report
Pegasystems Inc. (PEGA) : Free Stock Analysis Report
TechTarget, Inc. (TTGT) : Free Stock Analysis Report
Vertex, Inc. (VERX) : Free Stock Analysis Report
