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Successful investing calls for the appropriate identification of overpriced stocks and correctly priced stocks. Yet, in practice, overhyped toxic stocks and fairly priced stocks are intermixed in the marketplace in such a way that it becomes difficult to distinguish between them. Investors who can correctly spot the overpriced stocks and shun them at the right time are the ones likely to make a profit.

Usually, toxic stocks are fraught with huge debt loads and are susceptible to external shocks. Also, the unjustifiably high price of the toxic stocks is short-lived as the intrinsic value of these stocks is less than their current price. Quite naturally, if you own such toxic stocks for a long period of time, you are sure to make a huge loss in your wealth.

Higher price of the toxic stocks can be attributed to either an irrational exuberance associated with them or some serious fundamental lacuna. If you own such stocks for long, you are likely to see a big loss in your wealth.

On the contrary, if you can accurately pinpoint the toxic stocks, you are likely to gain by resorting to 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, just like picking up stocks with strong growth potential, pinpointing toxic stocks and abandoning them at the right time is the key to protect your 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 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 a 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 the current and 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 17 stocks that made it through the screen:

Manchester United Ltd. (MANU Quick Quote MANU - Free Report): Manchester United owns and operates a professional sports team. Over the past 60 days, the Zacks Consensus Estimate for 2021 has deteriorated from earnings of a penny to a loss of 31 cents per share. The bottom-line projection indicates a year-over-year plunge of 210%. The company currently has a Zacks Rank #5 (Strong Sell).

Las Vegas Sands (LVS Quick Quote LVS - Free Report): Las Vegas Sands is a leading international developer of multi-use integrated resorts, primarily operating in the United States and Asia. The Zacks Consensus Estimate for 2021 loss has widened from 3 cents per share to 75 cents over the past 30 days. The company currently has a Zacks Rank #5.

Melco Resorts & Entertainment Limited (MLCO Quick Quote MLCO - Free Report): This Zacks Rank #5 company is a developer, owner, and operator of casino gaming as well as entertainment casino resort facilities, primarily in Asia. The Zacks Consensus Estimate for 2021 loss has widened from 70 cents per share to 72 cents over the past 30 days.

Carrols Restaurant Group, Inc. (TAST Quick Quote TAST - Free Report): This Zacks Rank #4 (Sell) company is the largest BURGER KING franchisee in the United States, with more than 800 restaurants. The Zacks Consensus Estimate for Carrols’ 2021 earnings has been revised 133% downward over the past 60 days.