There are always some stocks which illusively scale lofty heights in a given time period. However, the good show doesn’t last for these overblown toxic stocks as their current price is not justified by their fundamental strength.

Toxic companies are usually characterized by huge debt load and are vulnerable to external shocks. Accurately identifying such bloated stocks and getting rid of them at the right time can protect your portfolio.

Overpricing of these toxic stocks can be attributed to either an irrational enthusiasm surrounding them or some serious fundamental drawbacks. If you own such bubble stocks for an inordinate period of time, you are bound to see massive erosion of wealth.

However, if you can precisely spot such toxic stocks, you may gain by resorting to an investing strategy called short selling. This strategy allows one 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, just like identifying stocks with growth potential, pinpointing toxic stocks and offloading them at the right time is crucial to guard one’s portfolio from big losses or make profits by short selling them.

Screening Criteria

Here is a winning strategy that will help you identify overpriced toxic stocks:

Most recent Debt/Equity Ratio greater than the median industry average: High debt/equity ratio implies increased 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 fiscal year and the next over 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. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Here are four of the 15 toxic stocks that showed up on the screen.

R1 RCM Inc. (RCM - Free Report) : Headquartered in Chicago, R1 RCM offers financial services to health care industries. Currently, the stock carries a Zacks Rank #5 (Strong Sell) and a VGM Score of D. The Zacks Consensus Estimate for 2021 earnings has moved 69% south over the past 30 days. The company lagged earnings estimates in three out of the trailing four quarters and beat once, with an average negative earnings surprise of 38.9%.

Paycom Software, Inc. (PAYC - Free Report) : Headquartered in Oklahoma, Paycom is a provider of cloud-based human capital management software as a service solution for integrated software for both employee records and talent management processes. The stock carries a Zacks Rank #5 and a VGM Score of F, at present. Over the past 30 days, the respective Zacks Consensus Estimate for 2021 and 2022 earnings have been downwardly revised by 9 cents and 24 cents, respectively.

DexCom, Inc. (DXCM - Free Report) : San Diego-based DexCom is a medical device company focused on the design, development and commercialization of continuous glucose monitoring systems. The stock presently carries a Zacks Rank #5 and has a VGM Score of D.The Zacks Consensus Estimate for 2021 earnings suggests a year-over-year decline of 21%. Over the past seven days, the Zacks Consensus Estimate for 2021 and 2022 earnings have been downwardly revised by 86 cents and 74 cents, respectively.

Hexcel Corporation (HXL - Free Report) : Stamford-based Hexcel manufactures and distributes lightweight, high-performance structural materials for use in Commercial Aerospace, Space & Defense, as well as Industrial markets. The stock currently has a Zacks Rank #4 (Sell) and a VGM Score of C. The Zacks Consensus Estimate for 2021 earnings has declined 64.4% over the past 30 days. The company lagged earnings estimates in three out of the trailing four quarters and met once, with an average negative surprise of 144.7%.