With the stock markets consistently printing new record highs, it is prudent to consider whether it’s time to jump ship on some stocks surging too high, too fast. This is a logical line of inquiry, given the strong rise since marking a bottom back in October. The benchmark S&P 500 index has seen its price-to-earnings (P/E) ratio increase to approximately 28, nearly double its ten-year average of 15x. Analysts express concern that certain growth stocks may have surged too high, too fast.
Of course, valid factors can positively influence individual stock performance at times. For example, Nvidia’s (NASDAQ:NVDA) meteoric surge has coincided with comparable expansion in sales and profits attributable to demand for artificial intelligence (AI). However, not all stocks surging too high show similar fundamentals to back their gains.
One way to assess if a stock has surged too high, too fast, is to determine whether it has entered overbought status. This is easily achieved by looking at momentum indicators such as the popular Relative Strength Index (RSI). The approach can be an interesting starting point for identifying stocks surging too high but whose valuations have yet to keep pace with bullish market sentiment. Such surging stocks may be primed for a correction as their costs return to levels aligned with their intrinsic value.
Dicks Sporting Goods (DKS)
Dicks Sporting Goods (NYSE:DKS) saw a 15% gain in its stock price following its latest quarterly earnings release. Sales grew 5% while net income was flat, resulting in a lower profit margin. Investors were likely pleased with a dividend increase to $1,10. These are solid results for an established company like Dicks.
DKS price has risen 46% year to date (YTD), significantly outpacing management’s comparable annual sales growth of 2.7%. In addition, this sales growth lags Dicks’ industry peers, who foresee 5.2% annual growth. Its P/E ratio of 18.9x remains below the P/E of 25.9x for the speciality retail sector. Yet, its 14-day RSI stands at approximately 83. This brings the surging stock to overbought territory and nearly double the industry median of 48. Given the company’s financial projections, analysts also believe this is one of the stocks surging too high, too fast.
Sweetgreen (SG)
The fast-casual restaurant chain Sweetgreen (NYSE:SG) is another one of the stocks surging too high following the release of its earnings results for the full 2023 year. SWT nearly doubled since the beginning of the year, compared to sales growth of just 24% in the previous period. While the company did improve its EPS estimates by 1.2%, it remained firmly unprofitable.
Since the earnings report, SG’s stock price has surged 70%, pushing its RSI to approximately 88, well into overbought territory. Notably, the average RSI for the restaurant industry stands at 48, nearly half of Sweetgreen. At the same time, the company is forecasting sales growth of only 13% for the year, a slowdown from the previous year’s pace. Also, analysts foresee a 24% drop in the stock price, with nearly 15% of the company’s float currently shorted.
Constellation Energy (CEG)
Generally, utilities are seen as stable and reliable organizations. However, Constellation Energy (NASDAQ:CEG), which provides natural gas, electricity, and energy management services, saw share price jump by 47% this year.
On the plus side, a significant portion of the growth occurred after reporting earnings results demonstrated a sizable rise in Adjusted EBITDA due to favorable market conditions. However, a view under the hood tells a different story.
The soaring price of CEG is a bit of a surprise, given that the company transitioned to a net loss in Q4 as it ramped up investments. While they may provide returns over the long term, the regulatory approval process for new nuclear power plants is notoriously long and complex. It could take years before the investments translate back to profits. The company’s shares show an RSI of approximately 69. And, the P/E ratio is 33.7x, well above the industry average of 48 and 19.2, confirming the assessment relative to peers.
On the date of publication, Stavros Tousios did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.