RSA has seen its stock value rise 17% in value during the past six months; Burberry 28%; and RBS 38%. However, I believe one of these stocks is now looking dangerously overbought. Which is it?
Demand for RSA’s shares have rocketed thanks in no small part to the impact of sterling weakness. More than two-thirds of the company’s profits are sourced in foreign currencies, providing the bottom line with a not-so-insignificant tailwind.
RSA has also shot higher after confirming that it continues to make serious inroads in its overseas territories. This is particularly so in Scandinavia, where net written premiums shot 6% higher during January-September.
And I believe the insurer’s attractive valuations could lead to further share price strength. An expected 34% earnings advance in 2017 creates a P/E ratio of just 13.4 times, as well as a sub-1 PEG readout of 0.4.
Meanwhile, a projected 20.6p per share dividend creates a yield of 3.6%, nipping above the FTSE 100 average of 3.5%.
Bag a beauty
Handbag hero Burberry doesn’t carry the same sort of attractive valuations as RSA.
The company deals on a P/E ratio of 19.4 times and 18 times for the periods to March 2017 and 2018 respectively. And expected dividends of 38p and 40.8p per share for this year and next generate yields of ‘just’ 2.6% and 2.8%.
Still, I — like many other stock pickers — believe Burberry does offer exceptional value despite these uninspiring ‘paper’ valuations. Indeed, the business remains in great shape to deliver strong earnings growth in the years ahead despite current pressure in the luxury goods market, illustrated by anticipated earnings expansion of 8% and 7% in fiscal 2017 and 2018.
The huge sums Burberry is ploughing into product development and brand improvement is helping new lines like its Buckle bag and runway rucksack fly off the shelves. And the fashion giant’s devotion to bolstering its digital operations across the globe also promises rich rewards.
But unlike RSA and Burberry, RBS can’t rely on a broad geographical footprint to deliver strong earnings growth in the years ahead.
Instead the bank faces an uncertain future as its strong UK bias leaves it at the mercy of painful Brexit negotiations, and with it sinking revenues and a probable rise in bad loans. At the same time RBS is also likely to face a rise in PPI-related penalties, particularly as the number of claims has started to ramp up again.
These put City predictions of a 22% earnings jump in 2017 under significant pressure, in my opinion, and with it a P/E ratio of 14.1 times, just below the FTSE 100 forward average of 15 times.
And RBS’s failure to hurdle Bank of England stress tests in November have cast doubts on the firm resurrecting its dividend policy any time soon. Not that current dividend forecasts are much to write home about anyway — a predicted 0.4p per share payout creates a yield of just 0.2%.
I believe the risks at RBS far outweigh any potential rewards, and reckon the prospect of a sinking UK economy in 2017 puts the bank in danger of reversing recent share price gains.
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Royston Wild has no position in any shares mentioned. The Motley Fool UK has recommended Burberry. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.