Are these FTSE 100 stocks shockingly overvalued?

Royston Wild looks at two FTSE 100 (INDEXFTSE: UKX) stocks that could be considered overly expensive.

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Gold has enjoyed a mini-resurgence in recent sessions, as a weaker US dollar has made the so-called ‘rush to safety’ asset more attractive to buy. The yellow metal has struck levels not seen since mid-November this week above $1,200 per ounce.

A turbulent year

Having said that, gold continues to range within a tight $100–$200 bracket, as a variety of political and economic factors, from uncertainty following the election of President Donald Trump, to expectations of Federal Reserve hikes in the not-too-distant future, dominate investor thinking.

And with 2017 promising to be as turbulent as last year, as the painful Brexit process continues in Westminster and major elections take place across Europe, it is difficult to know whether the bulls or the bears will wrest control.

As such, it could be argued that investing in Randgold Resources (LSE: RRS) is pretty risky business at the present time.

City brokers are not sitting on the fence, however, and expect earnings at the gold digger to rise, as a resilient gold price — combined with Randgold’s capacity ramp-ups — keeps revenues on an upward trend. On top of this, the mining giant’s commitment to keep slashing costs is also anticipated to drive the bottom line higher.

On the sidelines

Indeed, Randgold is expected to follow an anticipated 42% earnings rise in 2016 with additional meaty increases of 21% this year and 16% in 2018.

But however impressive these figures are, Randgold is still left dealing on P/E ratios of 23.1 times and 19.9 times for this year and next, striding above the FTSE 100 average of 15 times.

For many investors these premiums may be hard to swallow, given that the direction of metals prices this year and beyond remains open for debate. And this is perhaps good enough reason to sit on the sidelines for the time being.

Pricey Primark

Many would also consider Associated British Foods (LSE: ABF) to be an unattractive stock selection looking at its elevated paper valuations.

Like Randgold Resources, the number crunchers expect the Primark owner to enjoy solid earnings growth during the medium term, with expansion of 12% and 10% chalked in for the periods ending September 2017 and 2018 respectively.

These figures produce result in heady P/E ratios of 20.1 times and 18.3 times for this year and next. But while these numbers also sail above the Footsie average, many share selectors may still consider Associated British Foods to be an appealing long-term selection.

Global expansion

The business saw Primark sales rise 11% at constant currencies during the 16 weeks to January 7, with Associated British Foods noting particular strength in the UK. And this is a trend I expect to continue, as rising inflationary pressures at home drive demand for the company’s cut price togs.

Furthermore, Associated British Foods can also look towards its global expansion drive to keep driving turnover — the business aims to open another 1.3m square feet of shopping space in the current financial year alone.

With the business also well placed to benefit from sterling’s steady slide at its Retail and Sugar divisions, I believe Associated British Foods is in great shape to keep pumping out decent earnings growth.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Royston Wild has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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