Accurate identification of correctly priced stocks is crucial for successful investing. However, in reality, the correctly priced stocks and overpriced toxic stocks are intermixed in such a way that it is very tough to distinguish between them.

Generally, overpriced toxic stocks are vulnerable to external shocks. Moreover, these stocks are burdened with a large amount of debt. The price of these stocks is artificially inflated. However, the higher price of toxic stocks is only transitory 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 price falls.

While short selling excels in bear markets, it typically loses money in bull markets.

So, correctly figuring out toxic stocks and discarding or short selling them at the right time is the key to shield 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 13 toxic stocks that showed up on the screen:

Leawood, KS-based AMC Entertainment Holdings, Inc. (AMC – Free Report) operates as a theatrical exhibition company primarily in the United States. Over the past 30 days, the Zacks Consensus Estimate for current-quarter earnings has widened from a loss of 45 cents to a loss of 46 cents. The stock currently has a Zacks Rank #3.