Are these FTSE 100 stocks shockingly overvalued?

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

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

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.

More on Investing Articles

Investing Articles

After it crashed 25%, should I buy this former stock market darling in my Stocks and Shares ISA?

Harvey Jones has a big hole in his Stocks and Shares ISA that he is keen to fill. Should he…

Read more »

happy senior couple using a laptop in their living room to look at their financial budgets
Investing Articles

How’s the dividend forecast looking for Legal & General shares in 2025 and beyond?

As a shareholder, I like to keep track of the potential dividend returns I could make from my Legal &…

Read more »

artificial intelligence investing algorithms
Investing Articles

Could buying this stock with a $7bn market cap be like investing in Nvidia in 2010?

Where might the next Nvidia-type stock be lurking in today's market? Our writer takes a look at one candidate with…

Read more »

Investing Articles

Is GSK a bargain now the share price is near 1,333p?

Biopharma company GSK looks like a decent stock to consider for the long term, so is today's lower share price…

Read more »

Snowing on Jubilee Gardens in London at dusk
Investing Articles

Could December be a great month to buy UK shares?

Christopher Ruane sees some possible reasons to look for shares to buy in December -- but he'll be using the…

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

Sticking to FTSE shares, I’d still aim for a £1,000 monthly passive income like this!

By investing in blue-chip FTSE shares with proven business models, our writer hopes he can build sizeable passive income streams…

Read more »

Growth Shares

BT shares? I think there are much better UK stocks for the long term

Over the long term, many UK stocks have performed much better than BT. Here’s a look at two companies that…

Read more »

British Pennies on a Pound Note
Investing Articles

After a 540% rise, could this penny share keep going?

This penny share has seen mixed fortunes in recent years. Our writer looks ahead to some potentially exciting developments in…

Read more »