Over­stretched U.S. stocks

The Globe and Mail Metro (Ontario Edition) - - Globe Investor - PETER ASH­TON

What are we look­ing for?

High-fly­ing U.S. stocks with sig­nif­i­cant price run-ups in 2017 that may now be get­ting over­stretched.

So far, 2017 has been a great year for U.S. stocks, with the ma­jor in­dexes log­ging dou­bledigit gains. The broad S&P 500 is up 14 per cent year to date, putting it on course for the best an­nual per­for­mance since 2013. Many in­di­vid­ual stocks have also seen huge gains, with many widely held stocks up 20 per cent, 30 per cent and even 40 per cent year to date. At some point, one must won­der if the cur­rent eu­pho­ria is over­done and if some of th­ese stocks are due for a pull­back. The screen

We will be us­ing Recog­nia Strat­egy Builder to search for high-fly­ing U.S. stocks that may be get­ting over­stretched.

We be­gin by set­ting a min­i­mum mar­ket cap­i­tal­iza­tion thresh­old of $5-bil­lion (U.S.) to fo­cus on larger, more sta­ble and es­tab­lished com­pa­nies in the mar­ket. Next, we will look for com­pa­nies that are trad­ing within 2.5 per cent of their 52week highs. We will also spec­ify stocks with prices that are up by at least 35 per cent year to date.

Fi­nally, in or­der to select stocks show­ing signs of be­ing over­bought, we will use a tech­ni­cal os­cil­la­tor known as RSI (rel­a­tive strength in­dex). RSI mea­sures a stock’s cur­rent rel­a­tive strength com­pared with its own price his­tory. We will con­sider only stocks that have had a re­cent bear­ish RSI event flag­ging an over­bought con­di­tion. More about Recog­nia

Recog­nia is a global leader in au­to­mated quan­ti­ta­tive anal­y­sis and en­gage­ment so­lu­tions for re­tail on­line bro­kers and in­sti­tu­tions. Recog­nia’s prod­uct suite pro­vides ac­tion­able trad­ing ideas based on tech­ni­cal and fun­da­men­tal re­search cover­ing stocks, ETFs, in­dexes, forex, op­tions and com­modi­ties. What did we find?

Tran­sunion is a U.S. credit bu­reau pro­vid­ing credit in­for­ma­tion on more than one bil­lion in­di­vid­u­als in 30 coun­tries. Af­ter a strong per­for­mance through most of 2017, the stock was hit hard in early Septem­ber af­ter the Equifax data breach was an­nounced. Af­ter drop­ping more than 15 per cent, the stock re­sumed its rally and is now up more than 60 per cent year to date.

With a year-to-date stock price in­crease of 109 per cent, En­ergy Inc. is among the best-per­form­ing stocks on our list. NRG is an elec­tric power util­ity based in the north­east­ern United States. Many U.S. util­ity stocks were hard hit in 2016 as con­cerns about ris­ing rates saw in­vestors flee for less-in­ter­e­strate-sen­si­tive stocks. In­vestor ex­pec­ta­tions of muted in­ter­e­strate hikes have helped NRG stock more than dou­ble in 2017.

One of the largest com­pa­nies on our list is cruise-ship op­er­a­tor Royal Caribbean Cruises Ltd., with a mar­ket cap of more than $26-bil­lion. In spite of a worse-than-nor­mal Caribbean hur­ri­cane sea­son in 2017, Royal Caribbean stock is up 52 per cent year to date and is now trad­ing only 1 per cent off its 52-week high.

If you don’t own th­ese stocks cur­rently, you can watch for a pull­back to con­sider that as a po­ten­tial en­try point. But if you own th­ese stocks and plan to hold them for the long term, cau­tion would be war­ranted.

The in­vest­ment ideas pre­sented here are for in­for­ma­tion only. They do not con­sti­tute ad­vice or a rec­om­men­da­tion by Recog­nia Inc. in re­spect of the in­vest­ment in fi­nan­cial in­stru­ments. In­vestors should con­duct fur­ther re­search be­fore in­vest­ing. Peter Ash­ton is vice-pres­i­dent of re­tail and self-di­rected in­vest­ing at Recog­nia Inc. Globe Un­lim­ited sub­scribers can read more Num­ber Crunch­ers at tgam.ca/cruncher

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