Investors who can accurately distinguish between overpriced and rightly priced stocks emerge as winners at the end. However, in this tricky marketplace, these two types of stocks are inter-mixed in such a way that it is very tough to differentiate them. Investors who can appropriately spot toxic stocks and discard them at the right time are likely to gain.

Generally, the overhyped toxic stocks are exposed to external shocks and are burdened with high amount of debts. Also, the price of the toxic stocks is unreasonably high. The irrationally high price of the toxic stocks is only transitory in nature as their intrinsic value is lower than the current bloated price.

The overblown price of toxic stocks can be attributed to either an irrational exuberance associated with them or some deep-rooted drawbacks in the stock. Owning such stocks for a long stretch of time may result into huge erosion of wealth.

On the other hand, investors may gain from the accurate identification of toxic stocks with the help of 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, pointing out toxic stocks and removing them at the right time is the key to safeguard your portfolio from big losses. Profits can be made by short selling them.

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 five of the 17 toxic stocks that showed up on the screen:

PTC Inc. (PTC - Free Report) is a Needham, MA-based software company engaged in developing, marketing and supporting software solutions. Over the past month, the Zacks Consensus Estimate for current quarter earnings remained unchanged at 37 cents. The stock currently has a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Houston, TX-based Apache Corporation (APA - Free Report) is engaged in exploration, development and production of natural gas, crude oil and natural gas liquids. Over the past month, the Zacks Consensus Estimate for current quarter earnings declined from 7 cents to 2 cents per share. The stock currently has a Zacks Rank #3.

Wilmington, DE-based Incyte Corporation (INCY - Free Report) is a drug discovery company. Over the last seven days, the Zacks Consensus Estimate for current quarter earnings remained unchanged at 3 cents per share. Incyte carries a Zacks Rank #3.

Quincy, IL-based Titan International, Inc. (TWI - Free Report) is engaged in manufacturing and sale of wheels, tires, wheel and tire assemblies, and undercarriage systems and components for off-highway vehicles. Over the past month, the Zacks Consensus Estimate for current quarter earnings remained unchanged at a penny per share. The stock currently has a Zacks Rank #5 (Strong Sell).

Carbonite, Inc. (CARB - Free Report) is a Boston, MA-based computer services company engaged in providing cloud backup and restore solutions to small and medium sized businesses. Over the past month, the Zacks Consensus Estimate for current quarter earnings remained unchanged at 21 cents per share. The stock currently has a Zacks Rank #3.