After Recent Gains, Should You Stay Away From Diageo plc, SABMiller plc, Reckitt Benckiser Group Plc, Imperial Tobacco Group PLC & ARM Holdings plc?

As the FTSE 100 closes in on record highs, some investors and analysts are starting to question whether or not the index’s constituents are overvalued at present levels. And there are five companies in particular that look to be overvalued after recent gains.  

Lofty expectations

Year to date SABMiller’s (LSE: SAB) shares have gained 11.3%, which is more than double the FTSE 100’s performance over the same period. The company’s earnings are set to fall 2% this year, before rebounding by 8% during 2016 and then a further 10% during 2017.

The company currently trades at a forward P/E of 24, which leaves little room for error if SAB fails to meet the City’s lofty growth forecasts. For this reason, it could be time to sell the brewing giant before the market turns its back on the company.

Insanely overvalued

Renowned fund manager Neil Woodford believes that Reckitt Benckiser (LSE: RB) is “insanely overvalued” and it’s easy to see why. Like SAB, Reckitt’s shares have risen by slightly more than 11% so far this year, easily beating the FTSE 100. And at present levels the company trades at a staggering 24.2 times forward earnings.

What’s more, Reckitt’s earnings are only expected to expand 4% this year, so the company’s premium valuation seems unwarranted. It could be time to sell Reckitt. 

Charging higher

ARM’s (LSE: ARM) shares have charged higher by nearly 20% so far this year, beating the FTSE 100 by a staggering 15%, in the short space of only two months. However, after these gains ARM really does appear to be overvalued. 

Even though City analysts expect ARM’s earnings to expand 69% during 2015, the company is still trading at a forward P/E of 38. ARM’s earnings are expected to growth by a fifth during 2016. But even so, the group is trading at a 2016 P/E of 32, which makes it one of the most expensive technology groups in the world.

Additionally, at these levels, the company’s dividend yield has been depressed to a minuscule 0.6%, although the payout is covered two-and-a-half times by earnings per share. 

Yield play

For much of the past decade, Imperial Tobacco’s (LSE: IMT) shares have tracked the FTSE 100 but in the past few months, the tobacco giant has seen its shares surge ahead of the index. Year to date, Imperial Tobacco’s shares have jumped 13.5% and the company now trades at a forward P/E of 15.5.

That being said, the company’s main attraction, its dividend yield, is still attractive.

Imperial yields 4% at present levels and the dividend payout is set to rise 10% this year. On this basis, Imperial does not look to be overvalued at present levels, and I think the company would still make a great pick for any income portfolio.

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Rupert Hargreaves owns shares of Imperial Tobacco Group. The Motley Fool UK has recommended ARM Holdings. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.