Today I am looking at three recent stock rockets in danger of falling back to earth.
BP
Fossil fuel giant BP (LSE: BP) has swept higher during the past month as investor sentiment towards the mining and energy sectors has improved. Indeed, the business has gained 15% since the corresponding point in September, a performance also helped by the US Justice Department’s decision earlier this month to cap fines related to the Gulf of Mexico spill at $20.8bn.
However, I believe this bubbly market appetite is misguided given that macroeconomic data continues to disappoint — Chinese GDP growth numbers this week showed the economy expand by ‘just’ 6.9% in July-September, a six-year trough. With OPEC pumping remaining resilient, and US producers hiking the rig count in the event of any oil price recovery, I believe the black gold price remains on shaky ground.
And BP’s recent share price gains leave the business looking chronically overvalued, in my opinion. With the City forecasting a 65% earnings rise in 2015, the energy giant is currently dealing on a P/E rating of 17.6 times. I for one am not so optimistic over BP’s long- and near-term earnings prospects, however, thanks to the aforementioned market imbalance, and believe a value closer to the bargain watermark of 10 times to be a fairer reflection of the risks facing the firm.
United Utilities Group
Make no mistake: the threat of drastic regulatory action across the utilities space makes stock picking across both the power and water sectors highly-risky, in my opinion. So while the rising trend of supplier switching denting the likes of Centrica and SSE may not affect water providers like United Utilities (LSE: UU), these firms are hardly nailed-on certainties for earnings growth.
Much of the market does not share these concerns at the present time, and United Utilities’ solid share price run has seen it advance 11% during the past four weeks alone. But given the potential roadblocks the business may face in terms of getting tariff rises past regulator Ofwat, combined with the colossal capital required to keep its pipes and stations functioning, I reckon United Utilities’ earnings outlook is far from appealing.
Predictions of a 10% earnings dip in the year to March 2016 alone leaves the business dealing on a far-too-heady P/E rating of 21 times, in my opinion. And while investors may be drawn in by a chunky 3.9% dividend yield, United Utilities’ recent vow to raise payouts at least in line with RPI until 2020 — rowing back from its previous pledge of RPI plus 2% — illustrates the growing stress on the firm’s balance sheet.
Polymetal International
It comes as little surprise that precious metals play Polymetal International (LSE: POLY) has enjoyed a solid run higher in recent weeks. The gold digger has ascended 8% during since the same point last month, and a splendid 38% since August’s troughs. But I believe now could be the time to cash in thanks to the murky outlook for the metal price.
Spot gold has exploded from last month’s multi-year lows and was recently dealing around four-month peaks at $1,180 per ounce. But doubt persists over how long this strength can last — Federal Reserve rate hikes are still expected sooner rather than later, a situation that will inevitably strengthen the dollar and remove a key support lever for the metal price.
On top of this, an environment of stubbornly-low inflation threatens to keep the lid on further gold price rises, while physical gold demand in the critical markets of China and India remains subdued. An expected 7% earnings drop at Polymetal in 2015 results in a hardly-catastrophic P/E ratio of 13.5 times. But I reckon the prospect of fresh commodity price weakness makes the miner a risky stock selection.