Precise identification of rightly priced stocks is the key to successful investing. But, in practice, overpriced toxic stocks and the correctly priced stocks are intermixed in such a way that it is not an easy task to distinguish them.

Generally, overpriced toxic stocks are susceptible to external shocks. Also, these stocks are burdened with a high level of debt. The price of these stocks is artificially inflated. However, the higher price of toxic stocks is only temporary in nature as it is above its true intrinsic value.

Investors may profit from precise identification of 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.

So, figuring out 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 16 toxic stocks that showed up on the screen:

Houston, TX-based Forum Energy Technologies, Inc. (FET - Free Report) is a global oilfield products company. In the last 30 days, the Zacks Consensus Estimate for the current quarter loss remained unchanged at 2 cents per share. 

Covanta Holding Corporation (CVA - Free Report) is a Morristown, NJ-based alternative energy company that provides waste and energy services in the United States and Canada. In the last 30 days, the Zacks Consensus Estimate for the current quarter remained unchanged at a loss of 10 cents per share.  The company currently has a Zacks Rank #3.

Baltimore, MD-based WillScot Corporation (WSC - Free Report) is a specialty rental services company, offering modular space and portable storage solutions. Over the last 30 days, the Zacks Consensus Estimate for current-quarter earnings remained unchanged at 2 cents per share. The stock currently has a Zacks Rank #4 (Sell).

Live Nation Entertainment, Inc. (LYV - Free Report) is a Beverly Hills, CA-based live entertainment company. Over the last 30 days, the Zacks Consensus Estimate for current-quarter earnings declined from 22 cents per share to 20 cents. The stock currently has a Zacks Rank #4.