What are we looking for?
Mid- and large-cap companies trading in the United States that could be considered overextended based on a combination of fundamental and technical analysis.
The screen
As Brexit has come and gone, investors interpreted the dip in financial markets at the time of the vote as a buying opportunity. Since June 27, the S&P 500, Nasdaq composite and Dow Jones industrial average have rallied 9 per cent, 13 per cent and 7 per cent, respectively. Furthermore, using Thomson Reuters's aggregates application, we can determine that U.S. stocks with market capitalizations above $1-billion (U.S.) are up about 7 per cent year to date.
Our screen looks for middle- and large-cap companies that can be considered overextended from a combined fundamental and technical perspective. We begin by looking for U.S.-listed companies with market caps above $1-billion, and which have returned more than 7 per cent year to date on a price-only basis.
Next, we're applying a technical indicator known as the relative strength index (RSI) to determine whether the stock is overbought or oversold. The RSI is a momentum indicator used to identify overbought and oversold conditions by comparing the magnitude of gains with losses for a given period. A number above 70 is considered overbought. We're looking for companies with a 14-day RSI above 70.
Using fundamental analysis, we're screening for companies that have a trailing price-to-earnings ratio greater than their respective 52-week average P/E ratios.
Lastly, we're looking for negative upcoming earnings surprise for the current quarter by comparing the mean analyst estimate for earnings per share to a Thomson Reuters proprietary Smart Estimate for EPS, which is essentially a weighted average EPS estimate dependent on analyst accuracy and estimate age. The difference between the mean estimate and the Smart Estimate is known as the predicted surprise. We're filtering for companies with a predicted surprise of minus 2 per cent or worse.
More about Thomson Reuters
Thomson Reuters delivers trusted news and intelligent information to more than one billion people in 140 countries every day. Our content, software and technology support the way professionals work in a rapidly changing, ever more complex world. Thomson Reuters Eikon is the platform used by financial and corporate clients to access top research, portfolio analytics, charting and screening for every asset class.
What did we find?
Using Thomson Reuters Eikon, our screen identified 13 companies that meet the screen criteria. Interestingly, nine of the companies on this list have a mean recommendation of buy. Furthermore, 10 of companies have experienced double-digit returns so far this year. Sorting the list by year-to-date return, Fair Isaac Corp., a software analytics company, tops the list. Fair Isaac has beat the Street estimate for EPS the past three quarters. The company will be reporting fourth-quarter earnings ending Sept. 30, 2016, on Nov. 3.
This commentary does not provide individualized advice or recommendations for any specific subscriber or portfolio. Investors should conduct further research before investing.