Accurate identification of overhyped toxic stocks and the rightly priced ones is very important for investing success. However, correctly figuring out toxic stocks and removing them at the right time to make some profits is not easy.

Overblown toxic stocks are usually susceptible to external shocks. Also, these stocks are burdened with a huge amount of debt. Price of these toxic stocks is unrealistically high. However, the high price of the toxic stocks is only short lived as it is higher than its intrinsic value.

Investors may gain from the correct identification of toxic stocks with the help of an investing strategy known as short selling. This strategy allows them 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, spotting toxic stocks and throwing them away at the right time is the key to guard 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 0: 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 18 toxic stocks that showed up on the screen:

Wilmington, DE-based Incyte Corporation (INCY – Free Report) is a drug discovery company. Over the past month, the Zacks Consensus Estimate for current quarter loss has narrowed from 14 cents per share to 5 cents. Incyte carries a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.