Peter Ashton is vice-president of client services at Recognia Inc.
What are we looking for?
With Federal Reserve chair Janet Yellen warning about stretched valuations in some sectors of the U.S. market, we want to look for U.S. stocks with large price movements this year that may now be finding themselves overbought.
We will be using Recognia’s Strategy Builder tool to search for U.S. stocks showing signs that they may have moved too far, too fast.
We begin by setting a minimum market capitalization threshold of $10-billion (U.S.) to focus on larger, more established companies in the market.
Next, we will look for companies with large upward price movements so far in 2014. Specifically, we will identify companies whose stock has moved up by 35 per cent or more year-to-date.
We will also identify companies with lofty valuations based on their PEG ratios. PEG is an accounting ratio derived by taking a company’s forward P/E ratio and dividing by its forward EPS growth rate. Our screen will identify companies with a forward PEG ratio of 10 or more.
Finally, to zero in on stocks showing signs of being overbought, we will use a technical analysis oscillator known as the relative strength index (not shown). Our screen will include only companies whose RSI has recently crossed below 70, signalling a bearish outlook.
More about Recognia
Recognia is a global leader in quantitative and technical analysis. It is accessible by more than 20 million investors and traders worldwide through leading retail online brokers. Recognia covers 85 exchanges worldwide, and analyzes 65,000 instruments daily including stocks, indexes, ETFs, currencies and futures.
What did we find?
Micron Technology is up more than 56 per cent year-to-date making it the highest price mover on our screen. The company has benefited this year from favourable market conditions for its memory chips used in many high-tech devices.
Botox maker Allergan is currently locked in a hostile takeover battle with Valeant Pharmaceuticals. The company is up 48 per cent year-to-date but short interest has been building and the stock has seen a number of bearish technical events since the start of July.
Biotech is considered by many to be one of the most overheated sectors of the U.S. stock market. San Diego-based Illumina manufactures genetic sequencing products for a variety of industries. The stock is up 55.3 per cent year-to-date, has a forward PEG ratio of 58.2 and had its RSI cross below 70 on July 11.
Delta Air Lines has run up 38.4 per cent since the start of the year, compared to 23 per cent for the NYSE Arca Airline Index. The company has the highest forward PEG ratio in our screen at 69.4.
The investment ideas presented here are for information only. Investors should conduct further research before investing.