To get rid of fundamentally weak toxic stocks is just as important as it is to invest in fundamentally strong companies. Toxic companies are usually characterized by huge debt loads and are vulnerable to external shocks. If you want to protect your portfolio health, make sure to identify such toxic stocks and dump them right away.
GoodRx Holdings Inc. GDRX, Insulet Corporation PODD, Vonage Holdings Corp VG, AppLovin Corporation APP and Embraer S.A. ERJ are a few such toxic stocks.
There are always some stocks that illusively scale lofty heights in a given time period. Yet, the good show doesn’t last for these overblown toxic stocks, as their current price is not justified by their fundamental strength. 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.
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 or equal to #3 (Hold): We have not considered Buy-rated stocks that generally outperform the market. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Here are five of the 33 toxic stocks that showed up on the screen:
GoodRx: This California-based company is a consumer-focused digital healthcare platform. In the last reported quarter, the company came out with quarterly earnings of 9 cents per share, missing the Zacks Consensus Estimate of 10 cents. Over the trailing four quarters, GDRX lagged earnings estimates twice, matched once and surpassed the same on another occasion, with the average negative surprise being 2.5%.
The Zacks Consensus Estimate for GoodRx’s earnings for the current year has been revised downward by 2 cents over the past 30 days. The consensus mark for 2023 earnings has also moved south by 11 cents over the past 60 days. GDRX currently carries a Zacks Rank #5 and a Value Score of D.
AppLovin: California-based AppLovin provides a technology platform that enables developers to market, monetize, analyze and publish their apps. In the last reported quarter, the company posted earnings 8 cents a share, missing the Zacks Consensus Estimate of 11 cents. Over the trailing four quarters, APP lagged earnings on all occasions, with the average negative surprise being 136.8%.
The Zacks Consensus Estimate for AppLovin’s earnings for the current year has been revised downward by 1 cent over the past 60 days. The consensus mark for 2023 earnings has also moved south by 2 cents over the past seven days. APP currently carries a Zacks Rank #5 and a Value Score of F.
Embraer: Brazil-based Embraeris an aviation company that designs, develops, manufactures, and sells aircrafts and systems internationally. In the last reported quarter, the company incurred quarterly loss of 43 cents per share, wider than the Zacks Consensus Estimate of 26 cents. Over the trailing four quarters, ERJ topped estimates twice for as many misses.
The Zacks Consensus Estimate for Embraer’s earnings for the current year has been revised downward by 14 cents over the past 30 days. The consensus mark for 2023 earnings has also moved south by 3 cents over the past seven days. ERJ currently carries a Zacks Rank #5 and a VGM Score of C.
Insulet: Massachusetts-based Insulet is a leading developer, manufacturer and marketer of the Omnipod Insulin Management System. The projection of a decline of 30-35% in drug delivery revenues in 2022 is concerning. Over the trailing four quarters, GDRX lagged earnings in three of the four trailing quarters and topped on the other occasion, with the average negative surprise being 21.5%.
The Zacks Consensus Estimate for Insulet’s earnings for the current year has been revised downward by 2 cents over the past 30 days. The consensus mark for 2023 earnings has also moved south by 2 cents over the past 30 days. PODD currently carries a Zacks Rank #4 and a VGM Score of F.
Vonage: U.S.-based Vonageoffers consumers and small businesses an affordable alternative to traditional telephone service by providing cloud communications services. In the last reported quarter, the company incurred a loss of a penny per share against the Zacks Consensus Estimate of earnings of 4 cents. Over the trailing four quarters, VG lagged earnings estimates twice, matched once and surpassed the same on another occasion, with the average negative surprise being 30%.
The Zacks Consensus Estimate for Vonage’s earnings for the current year has been revised downward by 2 cents over the past seven days. The consensus mark for 2023 earnings has also moved south by 16 cents over the past seven days. VG currently carries a Zacks Rank #4 and has a VGM Score of D.
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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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