These FTSE 250 stocks have surged in Q3. Time to sell up?

Royston Wild looks at three FTSE 250 (INDEXFTSE: MCX) shares in danger of a serious reversal.

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I have to confess that the share price recovery at The Restaurant Group (LSE: RTN) has taken me aback somewhat. The FTSE 250 (INDEXFTSE: MCX) company has seen its value surge 50% since the start of Q3, including a 14% ascent in Friday business.

Investors have been piling-in during end-of-week business after Restaurant Group announced the departure of company veteran and chief executive Danny Breithaupt with immediate effect. Former Paddy Power head Andy McCue will take the reins from mid-September.

But investors retuning to the stock are taking an almighty gamble, in my opinion. Restaurant Group faces monumental hurdles to begin moving back in the right direction, the company battling increased competition and falling footfall in retail parks where most of its eateries are located.

And sales at Restaurant Group are likely to remain under pressure as consumers rein-in spending following the Brexit referendum, and the fast-growing internet shopping segment takes further bites out of till activity at bricks-and-mortar stores.

I reckon a forward P/E rating bang on the big-cap average of 15 times fails to reflect the firm’s high risk profile, and believe a huge correction could be in the offing.

Copper set to crumble?

Copper giant Kaz Minerals (LSE: KAZ) has also been a popular pick since the current quarter kicked off, its share value adding 24% since the end of June.

But the red metal market’s alarming fundamental picture leaves Kaz Minerals and its peers in danger of a sharp reversal. Shipments of unwrought copper and copper products into China — consumer of around four-tenths of the world’s copper — crashed 14.3% in July from the previous month, to 360,000 tonnes.

This worrying demand picture leaves many brokers with a bearish take on copper prices looking ahead. Bank of America-Merrill Lynch for one expects the commodity to average $4,625 per tonne in 2017, down from $4,828 in the current period.

I believe Kaz Minerals and its peers remain on shaky ground, particularly as the next generation of ‘mega mines’ is scheduled to come on-line in the next few years to keep the market amply supplied.

And I reckon Kaz Minerals’ forward P/E rating of 89.1times leaves the stock looking seriously overbought.

Not-so-super market

Rising competition in the grocery sector also makes me fearful over the earnings outlook at Ocado Group (LSE: OCDO), in the near term and beyond.

The company has shrugged off such fears in recent weeks — not to mention the potential impact of pressured household incomes on Ocado’s more expensive products in the months ahead — and the online retailer has risen 29% since Q3 kicked off.

Internet giant Amazon pulled its tanks onto Ocado’s lawn by launching its own grocery delivery service in June, news that has prompted others in the sector to bolster their own online operations still further — Sainsbury’s has also begun offering same-day delivery in recent weeks. And of course Aldi and Lidl are likely to remain disruptors in the market long into the future.

I believe Ocado may struggle to pull back into the black, and reckon the firm’s prospective P/E rating of 153.4 times offers ridiculously bad value.

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 owns shares of and has recommended Amazon.com. 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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