Being able to identify and discard toxic stocks at the right time is what separates a good investor from a bad one. The stock market specialists know the traits of toxic stocks, which usually go unnoticed by a large number of investors, and therefore are able to avoid humongous losses.
To bridge this knowledge gap, let’s try to understand some of the basic characteristics of toxic stocks. Stocks that continue to lose value even when the overall market shows an upside can be identified as toxic stocks. In order to be sure if the stock is toxic or not, an investor needs to dive deeper into a company’s financials.
Financial statements are unarguably the best reflection of a company’s performance. If the company has high debt on its balance sheet and does not generate enough operating cash to meet its financial liabilities, then it can be identified as a distressed company. Investors should consider eliminating such stock/s from their portfolio.
Keeping a track of company’s latest strategies and deals is another way to identify a distressed company and hence a toxic stock. Companies that face lawsuits or regulatory issues are typically not considered as good investments by experts.
The risk of owing toxic stocks can also be avoided through diversification. Ideally, a well-diversified portfolio contains stocks from different industries and sectors. In such cases, if one stock losses its value, an upside in other stocks neutralizes the effects and the overall value of portfolio remains less to unaffected.
The basic understanding of toxic stocks can help investors avoid huge losses and derive maximum benefit from their portfolios. Short selling remains one of the most preferable ways to benefit from the downside associated with toxic stocks.
Dutch Bros Inc. BROS, Chegg, Inc. CHGG, Impinj, Inc. PI and AngioDynamics, Inc. ANGO are a few toxic stocks that you should dump from your portfolio.
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 23 toxic stocks that showed up on the screen:
Dutch Bros is an operator and franchisor of drive-thru shops, which focus on serving high-quality, hand-crafted beverages with unparalleled speed and superior services. The Zacks Consensus Estimate for BROS’ 2023 bottom line is pegged at a profit of 9 cents per share. The consensus mark has moved south from earnings of 10 cents per share to earnings of 9 cents per share over the past seven days. Dutch Bros missed earnings estimates in two out of the last four quarters and beat twice, with the average negative surprise being 16.07%. The company carries a Zacks Rank #4 (Sell) and has a VGM Score of D.
Chegg provides a social education platform. The Zacks Consensus Estimate for CHGG’s 2023 bottom line is pegged at earnings of 28 cents per share, implying a year-over-year deterioration of 24.32%. The consensus mark has moved south from earnings of 34 cents per share 30 days ago. CHGG beat earnings estimates in each of the four trailing quarters, with the average surprise being 17.13%. The company carries a Zacks Rank #4 and has a VGM Score of C.
Impinj provides referral and information network radio frequency identification solutions to the retail, pharmaceutical, healthcare, food and beverage and other industries. The Zacks Consensus Estimate for PI’s 2023 bottom line is pegged at a profit of 31 cents per share. The Zacks Consensus Estimate for the firm’s 2023 earnings has moved south from 39 cents 30 days ago. Impinj beat earnings estimates in two out of the four trailing quarters and missed in two, with the average surprise being 181.86%. The company carries a Zacks Rank #4 and has a VGM Score of F.
AngioDynamics designs, manufactures and sells a wide range of medical, surgical and diagnostic devices. The Zacks Consensus Estimate for ANGO’s 2023 bottom line is pegged at a profit of 3 cents per share. The Zacks Consensus Estimate for the firm’s 2023 bottom line has moved south from earnings of 6 cents per share 60 days ago. AngioDynamics beat earnings estimates in two out of the four trailing quarters and missed in two, with the average surprise being negative 50%. The company carries a Zacks Rank #5 (Strong 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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