May

27

Are Valuations A Bit Overdone?

Posted In: Stock Market

Stocks have been locked into a fierce rally for the last 2 months, pumping out huge gains and giving many an investor something to feel good about after a tumultuous 18 months.

Optimism Drives Rally
The big jump has been predicated on renewed economic optimism. Investors have taken solace in what appears to be some stabilization in the financial sector, with many large banks claiming they are adequately capitalized to cushion against future losses.

Another leading factor has been the “less worse” phenomenon. Most of the economic data hitting the Street still looks pretty lousy from a historical perspective, but it is no longer getting worse, something many analysts and investors point to as an indication of a pending recovery.

Stocks Surge
This optimism has been expressed in both the averages and individual stocks. The Dow bottomed out in early March just above the 6,400 mark, and has since rallied 30% to over 8,450. The S&P 500 looks much the same, up more than 37% from its 2009 low. Many individual stocks have posted gains that outpace even these impressive returns.

Some Stocks Look Very Expensive
So with a huge short-term rally on the books and many stocks retracing recent highs, valuations have once again become a hot topic. In order for stocks to trend higher, or even stabilize in higher ground for that matter, earnings will need to kick in to moderate valuations. As it stands, that has not happened, with earnings still looking very depressed from a weak consumer environment and a lack of commercial activity.

Valuations are frequently relied upon to identify value stocks, but on the flip side, valuations can also be extremely helpful when creating exit strategies.

Here are four stocks that have posted huge gains in the last 2 months, pushing their valuation readings to unusually high levels.

Pricey Stocks
American Express Co. (AXP) has had a blistering run over the last 2 months, climbing from $9.75 in early March to a recent high above $28. Earnings have climbed in tandem as well, but even with the current-year estimate pegged at 82 cents per share, this stocks looks very pricey, trading with a P/E multiple of 33X.

Caterpillar Inc. (CAT) shares are up big in the last 2 months, almost doubling in price as the company’s estimate picture has continued to decline. The current-year estimate is pegged at $1.25 per share, which means this stock has a forward P/E multiple of 30X, a steep premium to the overall market.

Corn Products Intl. (CPO) shares took off in late April, surging from less than $18 to a recent high above $27. But while shares were jumping higher, the estimates picture continued to weaken, with the current-year dropping to $1.76 per share from $2.39.

Deere & Co. (DE) has also rallied with the market over the last few months, with its share price more than doubling in value and topping off above the $48. The P/E multiple of 13X current-year earnings seems reasonable by itself, but analysts are projecting an earnings contraction in the next-year period.

Conclusion
The current rally that kicked off in March has been a breath of fresh air in a market that has struggled mightily for the last 18 months. But with share prices surging ahead of valuation metrics, it might be a good time to take some winners off the table and lock in some profits.

Michael Vodicka is a Momentum Analyst at Zacks Investment Research covering Momentum stocks. He also contributes to the Zacks Elite website to Target Recommendations and Stock of the Day. For more information please visit http://www.zacks.com.

Article Source: Are Valuations A Bit Overdone?