Get Rid of Your Stress by Dumping These 4 Toxic Stocks

Successful investing calls for the appropriate identification of overpriced stocks and correctly priced stocks. However, in practice, overhyped toxic stocks and fairly priced stocks are intermixed in the marketplace in such a way that it becomes difficult to distinguish between them. Investors who can correctly spot overpriced stocks and shun them at the right time are the ones likely to make a profit.

Usually, toxic stocks are fraught with huge debt loads and susceptible to external shocks. Also, the unjustifiably high price of the toxic stocks is short-lived as the intrinsic value of these stocks is less than their current price. Quite naturally, if you own such toxic stocks for a long period of time, you are sure to incur a huge loss of wealth. Tandem Diabetes Care TNDM Krispy Kreme DNUT, Caesars Entertainment CZR and Vestas Wind Systems VWDRY are a few such toxic stocks.

The higher price of the toxic stocks can be attributed to either an irrational exuberance associated with them or some serious fundamental lacuna associated with them. If you own such stocks for long, you are likely to see a big loss in your wealth.

On the other hand, if you can accurately pinpoint the toxic stocks, you are likely to gain by resorting to 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, just like picking up stocks with strong growth potential, pinpointing toxic stocks and abandoning them at the right time is the key to protect your portfolio from big losses or make profits 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 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.

Stocks to Discard

Here are four of the 21 toxic stocks that showed up on the screen:

Tandem Diabetes: Headquartered in California, TNDM designs, develops and markets products for people with insulin-dependent diabetes.

Tandem Diabetes currently carries a Zacks Rank #5 (Strong Sell) and has a VGM Score of F. The Zacks Consensus Estimate for TNDM’s 2022 bottom line implies a year-over-year plunge of 200%. The consensus mark has deteriorated from earnings of 35 cents a share to a loss of 26 cents over the past 90 days. The company has a trailing four-quarter negative earnings surprise of 298%.

Krispy Kreme: Based in North Carolina, Krispy Kreme operates as a branded retailer and wholesaler of doughnuts, coffee and other complementary beverages and treats and packaged sweets.

DNUT currently carries a Zacks Rank #4 (Sell) and has a VGM Score of D. The Zacks Consensus Estimate for Krispy Kreme’s 2022 bottom line implies a year-over-year decline of 19%. The consensus mark of earnings per share has moved south by a penny over the past 30 days. The company has a trailing four-quarter negative earnings surprise of 2%.

Caesars Entertainment: Headquartered in Nevada, Caesars Entertainment is a diversified gaming and hospitality company. Its primary source of revenues is gaming operations that include mobile, online gaming and sports betting.

CZR currently carries a Zacks Rank #4. The Zacks Consensus Estimate for Caesars Entertainment’s 2022 bottom line is pegged at a loss of $2.82 a share The consensus mark of loss per share has widened 2 cents over the past seven days. The company has a trailing four-quarter negative earnings surprise of 381%.

Vestas Wind: Based in Denmark, Vestas Wind is engaged in the development, manufacture, sale, and maintenance of wind technology that uses the energy of the wind to generate electricity.

VWDRY currently carries a Zacks Rank #4 and has a VGM Score of D. The Zacks Consensus Estimate for Vestas Wind’s 2022 bottom line implies a year-over-year plunge of 371.4%. The consensus mark of loss per share has moved south by 4 cents to 19 cents over the past 30 days. The company has a trailing four-quarter negative earnings surprise of 33.3%.

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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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Caesars Entertainment, Inc. (CZR) : Free Stock Analysis Report
 
Vestas Wind Systems AS (VWDRY) : Free Stock Analysis Report
 
Tandem Diabetes Care, Inc. (TNDM) : Free Stock Analysis Report
 
Krispy Kreme, Inc. (DNUT) : Free Stock Analysis Report
 
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