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Successful investing calls for the appropriate identification of overpriced and correctly priced stocks. In practice, the overhyped toxic stocks and the 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 the 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 are 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 make a huge loss in your wealth. Madison Square Garden Entertainment MSGE, Materialise MTLS, InnovAge Holding Corp INNV and Ligand Pharmaceuticals LGND are some such toxic stocks that you need to cut ties with.
The higher price of toxic stocks can be attributed to either an irrational exuberance associated with them or some serious fundamental lacuna. If you own such stocks for long, you are likely to see a big loss in your wealth.
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 protecting your portfolio from big losses or making profits by short selling them.
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 four of the 29 toxic stocks that showed up on the screen:
Madison Square provides entertainment experiences. The company presents or hosts events at its diverse venues: New York's Madison Square Garden, Hulu Theater at Madison Square Garden, Radio City Music Hall and Beacon Theatre; the Forum in Inglewood, CA and The Chicago Theatre. Also, under the MSG Entertainment umbrella is Tao Group Hospitality, with entertainment dining and nightlife brands, including Tao, Marquee, Lavo, Avenue, Beauty & Essex and Cathédrale.
Over the trailing four quarters, Madison Square missed earnings estimates on all occasions, the average negative surprise being 101.5%. The Zacks Consensus Estimate for MSGE’s loss for fiscal 2022 is pegged at $3.28 a share. The estimate has moved south by $1.18 per share over the past seven days. The consensus mark for earnings for the next fiscal year has also declined 38 cents over the past seven days. Madison Square currently carries a Zacks Rank #4 (Sell) and has a VGM Score of D.
Materialise is a provider of Additive Manufacturing software solutions and sophisticated 3D printing services in a wide variety of industries, including healthcare, automotive, aerospace, art and design and consumer products. This Belgium-based company specializes in the preparation of 3D prototypes for manufactures, software development, biomedical research, and online services.
The Zacks Consensus Estimate for MTLS’ 2022 earnings implies a year-over-year decline of 54%. The estimate has moved south by 7 cents per share over the past 30 days. The consensus mark for earnings for the next year has also declined 8 cents over the past 30 days. Materialise currently carries a Zacks Rank #4 and has a Value Score of C.
InnovAge is a healthcare delivery platform. This Denver-based company delivers its patient-centered care through the InnovAge Platform. InnovAge Platform is focused on frail, dual-eligible seniors as well as serves participants primarily through Program of All-inclusive Care for the Elderly.
Over the trailing four quarters, InnovAge missed the consensus mark for earnings twice for as many beats, the negative average surprise being 74.2%. The Zacks Consensus Estimate for INNV’s fiscal 2022 earnings estimate has moved south by 4 cents per share over the past seven days. The consensus mark for earnings for the next fiscal year has also declined 7 cents over the past seven days. InnovAge currently carries a Zacks Rank #4 and has a VGM Score of C.
Ligand is a biotechnology company focused on the development and licensing of biopharmaceutical assets. This San Diego-based firm’s business model is based on developing or acquiring royalty revenue-generating assets and coupling them with a lean corporate cost structure. Ligand’s dependence on the Captisol program and Captisol-based partnerships is concerning.
The Zacks Consensus Estimate for LGND’s 2022 earnings and sales implies a year-over-year decline of 60% and 41%, respectively. The Zacks Consensus Estimate for Ligand’s 2022 earnings estimate has moved south by 40 cents per share over the past seven days. The consensus mark for earnings for the next year has also declined 65 cents over the past seven days. LGND currently 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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Ligand Pharmaceuticals Incorporated (LGND) : Free Stock Analysis Report
Materialise NV (MTLS) : Free Stock Analysis Report
InnovAge Holding Corp. (INNV) : Free Stock Analysis Report
Madison Square Garden Entertainment Corp. (MSGE) : Free Stock Analysis Report
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