Precise identification of the rightly priced stocks is the key to successful investing. But, in reality, the correctly priced stocks and overpriced toxic stocks are intertwined in such a way that it is very difficult to isolate them.

Usually, overpriced toxic stocks are susceptible to external shocks. Moreover, these stocks are loaded with a large amount 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 higher than its true intrinsic value.

Investors are likely to benefit from accurate 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 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 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 15 toxic stocks that showed up on the screen:

Montreal, Canada-based Osisko Gold Royalties Ltd (OR - Free Report) is a mining company engaged in exploration and mining of gold and other precious metals. Over the past 30 days, the Zacks Consensus Estimate for current-quarter earnings has remained unchanged at 1 cent. The stock currently has a Zacks Rank #3. 

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 past seven days, the Zacks Consensus Estimate for the current quarter has remained unchanged at 10 cents per share.  The company currently has a Zacks Rank #3.

Toronto, Canada-based Agnico Eagle Mines Limited (AEM  - Free Report) is a gold producer with mining operations in Canada, Mexico and Finland, and exploration activities in Canada, Europe, Latin America, and the United States. Over the past 30 days, the Zacks Consensus Estimate for current-quarter earnings has changed from 6 cents per share to 5 cents. The stock currently has a Zacks Rank #3.

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 48 cents. The stock currently has a Zacks Rank #3.