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4 Toxic Stocks That May Risk Your Peace and Prosperity

The Fed’s hawkish pivot in 2022 has been a thorn in stocks’ side. Yesterday, the Fed jacked up interest rates by another 75 bps to combat the stubborn inflation. Amid exacerbated supply chain issues, sky-high inflation and aggressive rate hikes, recessionary worries are on the rise and Wall Street is likely to continue its choppy run. At this critical juncture, it’s as important to get rid of fundamentally weak toxic stocks as it is to invest in attractively valued companies possessing fundamental strength.

Toxic companies are usually characterized by huge debt loads and are vulnerable to external shocks. These stocks might illusively scale lofty heights in a given time period but the good show doesn’t last for these overblown toxic stocks, as their current price is not justified by their fundamental strength. Accurately identifying such bloated stocks and getting rid of them at the right time can protect your portfolio.

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 from big losses or make profits by short selling them. InnovAge Holding Corp INNVSpirit AeroSystems Holdings, Inc. SPR, Tandem Diabetes Care, Inc. TNDM and HCI Group HCI are a few such toxic stocks.  

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.

Say Bye to These Stocks

Here are four of the 35 toxic stocks that showed up on the screen:

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, topped once and met estimates on the other occasion, the negative average surprise being 120%. The Zacks Consensus Estimate for INNV’s fiscal 2023 bottom line has deteriorated from earnings of 6 cents a share to a loss of 1 cent over the past seven days. The consensus mark for earnings for the next fiscal year has declined 21 cents over the past seven days. InnovAge currently carries a Zacks Rank #5 (Strong Sell) and has a VGM Score of C.

Spirit AeroSystems: Based in Wichita, Spirit AeroSystems engineers, manufactures, and markets commercial aerostructures. The company’s core products include fuselages, pylons, nacelles and wing components.

The Zacks Consensus Estimate for SPR’s 2022 bottom line is pegged at a loss of $1.91 a share, widening from 20 cents a share 60 days ago. The consensus mark for the 2023 bottom line has moved south by 48% over the past 60 days. The company missed earnings in three of the trailing four quarters, while topping once, with the average negative surprise being 100.3%. SPR currently carries a Zacks Rank #5 and has a VGM Score of F.

Tandem Diabetes: Headquartered in California, TNDM designs, develops and markets products for people with insulin-dependent diabetes. The company’sbusiness is being hurt by heavy dependence on the sales of insulin pumps and escalating operating expenses.

Tandem Diabetes currently carries a Zacks Rank #5 and has a VGM Score of D. The Zacks Consensus Estimate for TNDM’s 2022 bottom line implies a year-over-year plunge of 796%. The consensus mark has deteriorated from earnings of 35 cents a share to a loss of 25 cents over the past 60 days. TNDM currently carries a Zacks Rank #5 and has a VGM Score of D.

HCI: Headquartered in Florida, HCI is a holding company that conducts its business activities through its subsidiaries. It is engaged in diverse business activities, including property and casualty insurance, information technology, real estate and reinsurance. 

The Zacks Consensus Estimate for HCI’s 2022 bottom line is pegged at a loss of 45 cents, implying a year-over-year deterioration of 314%. The consensus mark of 2023 has moved south by 70 cents in the past 60 days. Over the trailing four quarters, HCI missed the consensus mark for earnings twice for as many beats, with the average negative surprise being 229%. The stock currently carries a Zacks Rank #5.

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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 athttps://www.zacks.com/performance.


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Spirit Aerosystems Holdings, Inc. (SPR): Free Stock Analysis Report
 
HCI Group, Inc. (HCI): Free Stock Analysis Report
 
Tandem Diabetes Care, Inc. (TNDM): Free Stock Analysis Report
 
InnovAge Holding Corp. (INNV): Free Stock Analysis Report
 
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