Successful investing depends upon the accurate identification of the correctly priced stocks. However, in practice, the rightly priced stocks and the overpriced toxic stocks are intertwined in such a way that it is very difficult to distinguish between them.

Usually, overhyped toxic stocks are susceptible to external shocks. Moreover, these stocks are burdened with huge amount of debts. The price of these stocks is artificially inflated. However, the higher price of toxic stocks is only temporary in nature as it is higher than its true intrinsic value.

Investors are likely to gain from accurate identification of the toxic stocks with the help of an investing strategy called short selling. This strategy allows investors 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.

Therefore, accurately identifying toxic stocks and abandoning or short selling them at the right time is the key to protect your portfolio from big losses.

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 and the next fiscal year 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.

Here are four of the 19 toxic stocks that showed up on the screen:

Vancouver, Canada-based First Majestic Silver Corp. (AG – Free Report) is engaged in the production, development, exploration, and acquisition of silver mines in Mexico. Over the past 30 days, the Zacks Consensus Estimate for current-quarter earnings has changed from a gain of 5 cents per share to a loss of 3 cents. The stock currently has a Zacks Rank #3.