The stock market came into March like a lion. The SPDR S&P 500 ETF (SPY) gained 12% over the first two months of 2019. But it is leaving March like a lamb, flat for the month and negative during the past week.

At the same time, the CBOE Volatility Index (VIX) spiked above 17 after last week’s yield curve inversion. That means sophisticated investors like the folks that manage pension funds are starting to get nervous.

That being the case, now may not be the best time to aggressively load up on high-multiple momentum stocks. If the global economy continues to slow down, many of them will suffer the worst punishment.

However, there is still a way to profit from overvalued stocks. You can sell them short, but that strategy exposes you to unlimited risk. It also can require a large margin deposit with your broker.

Instead, I prefer buying put options on stocks that I believe are overvalued and likely to dive the next time the stock market turns down. That way, my risk is limited to what I paid for the option and my profit potential is considerably greater.

IDEAL for Buying Puts

During times like this, I turn to my IDEAL Stock Rating System to identify the stocks most vulnerable to a stock market correction. In short, IDEAL assigns points based on dividend yield, relative valuation, and change in net operating cash flow on a scale of 0 – 10.

For put options candidates, I limit my search to stocks that receive an IDEAL score of 0. That’s the lowest score possible and indicative of a grossly overvalued stock. That means they pay little or no dividend, trade at a high multiple to future earnings, and did not grow their net operating cash flow during the past year.

That doesn’t guarantee that they’ll take a dive the next time the stock market goes soft. But more often than not, that is the way it has worked out in the past.

I don’t choose only one or two stocks on which to buy put options. Instead, I’ll spread my money around at least four stocks that appear most overvalued according to my IDEAL System.

Four Poised to Fall

Here are four companies that have rebounded strongly recently and could take a big hit the next time the market turns sour.

• Boston Scientific (NYSE: BSX)
  

Medical device manufacturer Boston Scientific has run up 19% over the past three months, pushing its forward price-to-earnings (P/E) ratio up to 21 times this year’s earnings. That’s a bit pricey for a company that just acquired a business in the United Kingdom as the Brexit fiasco continues to roil that market.

• L-3 Technologies (NYSE: LLL)
  

Government contractor L-3 Technologies has gained nearly 20% this year, nearly twice the rise in the overall market. Yet earnings fell by 22% during its most recent quarter despite 8% revenue growth. Another quarter like that and I expect L-3 to quickly shed half of this year’s gain. L-3 is scheduled to release its fiscal Q1 results on May 1.

• Pentair (NYSE: PNR)
  

Pentair (NYSE: PNR) is a London-based provider of water pump and filtration systems. Up 21% since late December, it also is vulnerable to any Brexit fallout that may impede its ability to do business in Europe. Pentair functions like a utility but is valued more like a growth stock, so something has to give.

• Tiffany (NYSE: TIF)
  

Jewelry store chain Tiffany & Co. has gained nearly 40% after bottoming out below $75 three months ago. Yes, it was arguably oversold then after dropping 40% during Q4. However, it appears to have gotten ahead of itself after releasing better-than-expected Q4 results last week.

Tiffany now sports a price/earnings to growth (PEG) ratio of 2.0, meaning its P/E ratio is twice its earnings growth rate. That is double the threshold legendary fund manager Peter Lynch deemed reasonable for a growth stock.

There is no way of knowing exactly when these stocks may hit the skids. For that reason, I buy put options with an expiration date at least three months out. However, once I get my targeted price movement, I close them out immediately before they have a chance to recover.

That type of systematic approach to managing risk has worked well for me over the years. However, my colleague Jimmy Butts, chief investment strategist of the premium trading service Maximum Profit, has devised a system that has worked even better.

Jimmy has found a way to hack the stock market and pinpoint buy and sell signals before the rest of the investment herd. Over the last year, he has used this ingenious method to pocket $37,000. He’s beating the Wall Street “Big Boys” at their own game!

Want to know how Jimmy does it? Click here to find out.