Estimated read time: 3 minutes
Publication date: 5th Aug 2021 11:17 GMT+1
As the equity markets continue to trade at record levels it is also imperative for stocks to trade at sky-high valuations. Even from a technical perspective, several stocks might have entered overbought territory warranting a massive pullback, especially if the markets undergo a correction.
Here, we look at three stocks part of the S&P 500 that index that are overbought at current prices.
Advanced Micro Devices
The first stock on my list is Advanced Micro Devices (NASDAQ: AMD) that has a relative strength index (RSI) score of 83.72. An RSI score of over 70 indicates a stock is overbought. AMD stock has been on an absolute tear in the last five years and has returned a staggering 1,705% since August 2016. It has surged 22.7% in 2021 and has gained close to 19% in the last month on the back of stellar quarterly results.
In the June quarter, AMD’s sales almost doubled while adjusted earnings rose 250% year over year to $0.63 per share. The company also raised its guidance for 2021 and expects revenue to grow by 60% year over year, compared to its earlier forecast of 50%.
The semiconductor giant has increased its revenue from $5.32 billion in 2017 to $9.76 billion in 2020. Its operating income has improved from $204 million to $1.37 billion in this period. Wall Street expects sales to grow by 51% to $14.74 billion in 2021 while earnings are estimated to expand at an annual rate of 32.4% in the next five years. We can see why AMD stock continues to trade at a premium given its price to 2022 sales multiple of 8.5x and its price to earnings multiple of 44.2x.
However, analysts expect AMD stock to trade around $105 in the next 12-months which is 14% below its current trading price.
A cybersecurity giant, Fortinet (NASDAQ: FTNT) stock is up 115% in 2021 and has gained 20% in the last month. In the second quarter of 2021, Fortinet sales grew 30% year over year to $801 million, up from $618 million in the year-ago period. Its adjusted net income grew by 16% year over year to $159 million while free cash flow surged 83% to $395 million. Analysts forecast Fortinet sales to touch $743.65 million in Q2 while adjusted earnings were estimated at $143 million.
Fortinet’s management has forecast 2021 sales between $3.21 billion and $3.25 billion which is higher than its prior forecast of sales between $3.08 billion and $3.13 billion, indicating a year over year growth of 25% at the midpoint.
Fortinet has delivered consistent profits to shareholders as its free cash flow margin has been over 30% in the last few years. It ended Q2 with $3.36 billion in liquidity and less than $1 billion in debt.
Despite its stellar metrics, Fortinet stock might pull back given its RSI score of 83.63.
The final stock on my list is Nike (NYSE: NKE) which has an RSI score of 79.5. The retail heavyweight has also gained on the back of stellar quarterly results. Wall Street forecast the company to post sales of $11.05 billion with adjusted earnings per share of $0.51 in the fiscal fourth quarter of 2021. Comparatively, its sales rose 96% year over year to $12.3 billion while adjusted earnings rose to $0.93 in Q4.
The company increased its ad spending by 21% to $1 billion ensuring its remains one of the most recognizable brands on the planet. Its digital sales soared 40% in Q4 allowing Nike to improve its gross margin to 46%, up from 37.5% in the prior-year period.
It ended the fiscal year with $13.5 billion in cash, up from $8.8 billion in fiscal 2020, providing the company with enough flexibility to tide over the ongoing macro-economic uncertainty.
Disclaimer: The writer is an experienced financial consultant who writes for Finscreener.org. The observations he makes are his own and are not intended as investment or trading advice.
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