A few years ago, I was sledding with my wife in her hometown of Virginia Beach, when I heard someone yell "Whooooooo, Mount Trashmore!" as he soared down the snowy hill. Thoroughly confused, I turned to my wife and asked, "Mount Trashmore? What the heck is that?"

A dirty trick
I soon found out that Mount Trashmore is a landfill being put to new uses. In winter, covered in snow, it just looked like a great place to go sledding. In the spring, it becomes a park crowded with residents using basketball and volleyball courts, enjoying the rolling green hills, and climbing the hiking trails that surround a beautiful lake.

But underneath it all, it's just three miles of trash!

Why should you care?
If you think about that situation, it seems eerily similar to the stock market.

Consider this: How many times do you see a share price shoot up and think to yourself, "Wow, that must be a great company"? Then, after doing some research, you find out the business is drowning in debt and hasn't made money in years.

For instance, take a look at AIG. While the market has fallen about 6%, it has managed a near-15% price increase so far this year. All things considered, that's a pretty incredible return. But what's more incredible is that it received more than $180 billion in taxpayer bailout money, and still owes tens of billions. The company suffered from sloppy management and a tarnished brand and will have to muddle through the next few years as it sells off pieces of itself to repay taxpayers.

Rising prices can make companies look good on the surface -- just like Mount Trashmore looked good to me -- but when you take a closer look, they're simply trash.

Take a look at some of this debris: 


Price Increase


3-Year Annualized
Revenue Decline


Interface (Nasdaq: IFSIA)





Starwood Hotel & Resorts (NYSE: HOT)





CB Richard Ellis Group (NYSE: CBG)





Marriott International (NYSE: MAR)





Data from Google Finance and Capital IQ, a division of Standard & Poor's.

These stocks have brought astronomical gains in the past six months, but they're trading at ridiculously high valuations, they're riddled with an enormous amount of debt, and their businesses have been unable to sustain top-line growth. Nevertheless, they're seeing spikes in their prices as if they are about to enjoy tremendous earnings growth for several years.

Some of these companies may have been smart picks once upon a time, but if you have them in your portfolio right now, I'd seriously evaluate whether to take your gains and toss the stocks into the incinerator as fast as you can.

Don't be fooled
In actuality, Mount Trashmore isn't such a bad thing. It employs the best possible use of urban land by combining recreation with waste management.

But stocks like the ones above don't serve a purpose anymore. They're deceptive because of their extraordinary returns, and they often push you along with a herd of other investors who are concerned only about short-term price movements.

Many energy companies, despite the BP spill, have been able to absolutely crush the market; in particular, Interoil (NYSE: IOC) and Copano Energy (Nasdaq: CPNO) have brought gains of 84% and 62%, respectively. In addition, online commerce giant MercadoLibre (Nasdaq: MELI) has experienced gains of 105% in the past year -- no easy feat considering the sluggish pace of this year's recovery.

Now I'm no hater of any of these companies, but their forward P/E ratios are 174, 40, and 49 -- not exactly cheap by any stretch of the imagination. Sure, all have solid growth prospects, but at a certain point, prudent investors must ask themselves whether a stock is overvalued. My fellow colleague Tim Hanson recently argued that MercadoLibre is already fairly valued and could be poised for a drop.

Looking for stocks with huge run-ups that may not have been warranted is a great way to figure out whether a stock should be in your portfolio, or whether it's a solid shorting candidate. But just looking for these simple attributes isn't nearly enough.

Look beyond simple metrics like P/E ratios or negative earnings or growth rates, and dig a bit deeper. Finding stocks that are meant to be tossed into the trash, or shorted, requires a great obedience -- rummaging through annual reports to find earnings irregularities, overly aggressive accounting, or a possible disruption in management.

Being able to find these kinds of seemingly trivial, yet priceless pieces of data can help you in your quest to find the worst stocks around. After all, shorting a stock can reap as big a reward as anything. A company's demise can often act as a great hedge for the rest of your portfolio in uncertain times -- or it could simply be a wonderful bet in your favor.

So don't set yourself up to short a stock based on rudimentary analysis. Instead, learn more about how to identify companies with troubling financials. If you're interested, get a free copy of "5 Red Flags -- How to Find the Big Short," a new report from John Del Vecchio, CFA, a forensic accountant. The report costs nothing -- simply enter your email address in the box below.

Jordan DiPietro doesn't own any shares mentioned above. MercadoLibre is a Motley Fool Rule Breakers pick. The Fool has a disclosure policy.