Shares of Procter and Gamble (NYSE:PG) made a fresh all-time high recently following earnings. PG stock traded up to nearly the $100 level before finally running into resistance. It made another all-time high today, but the $100 level again stymied it. Could now be the time to take a counter-trend short position on an overbought and overvalued Procter and Gamble?
PG reported earnings Jan. 23, beating on both the top and bottom line. EPS came in at $1.25 per share, slightly higher than the $1.21 analyst estimates. Revenue also topped forecasts at $17.44 billion compared to expectations of $17.15 billion.
So while earnings beat by 2.4% and sales by 3.3%, PG stock rallied almost 10% in response. This now puts the P/E ratio near the highest level of the past year at nearly 24. The last time Procter and Gamble was valued so richly was mid December, right before a sharp 12% pullback in the stock.
PG stock is also at the highest price to sales ratio over the past 10 years at nearly 4 times sales. The company expects total sales to be flat for 2019, so certainly sales growth is not the reason for the extreme valuations.
PG stock is getting decidedly overbought on a technical basis. Procter and Gamble made a new all time intra-day high of $99.70 on Feb. 13 before reversing course to actually close slightly lower on the day.
This type of reversal pattern is a doji candlestick pattern. It indicates exhaustion as the buyers may have finally become fatigued. It is especially symbolic after such a strong rally, like the most recent one in PG. And the stock tried again today, but again seems to be fading.
Click to Enlarge Other technical indicators are also flashing red. The 9-day RSI is finally weakening after breaching the overbought 70 level. Prior instances when PG stock was this overbought proved to mark significant intermediate-term tops in the stock.
The 14-day detrended price oscillator also reached an extreme reading before weakening as well.
PG is trading at a large premium to the 20-day moving average which almost invariable lead to a pullback in the past. MACD is turning lower after printing at the second highest level of the past year. Implied volatility is now at trough valuations, yet another sign of over complacency.
The combination of a historically rich valuations and overbought technicals makes PG stock a good candidate for a short-term short, especially now that the rally has fizzled at the $100 level. I would look to short PG stock near current levels with a downside profit objective of near the earnings gap of $93. Option traders may elect to take advantage of dirt cheap option prices and buy the April $97.50 puts to take a more aggressive short stance.
Tim Biggam may hold some of the aforementioned securities in one or more of his newsletters. Anyone interested in finding out more about Tim and his strategies can go to https://marketfy.com/item/options-and-volatility.
