Overvalued and Overbought: 6 Stocks That Could Plunge

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 |  Includes: COOL, EOG, OLN, PKD, TZOO, WFM
by: Rougemont

All of the stocks below have been in a solid uptrend recently. They (mostly) have solid businesses and growth potential, but they have reached very overbought levels and have high PE ratios. With so many cheap stocks still available, it makes no sense to buy these stocks at their current price levels. In fact, you may want to consider taking profits in some of these names and buying them back on corrections or rotating into some stocks with lower valuations. If you don't own these names but are considering them, it could pay to wait for a pullback, as these stocks are likely to correct.

These shares have high PE ratios, are trading well above their 50 and 200 day moving averages and appear overbought. In particular, I am looking at the Relative Strength Index (RSI) levels which can indicate overbought conditions. Stocks with an RSI rating around 70 can signal that the shares are overbought and due for a correction.

It's important to take profits when times are good and raise cash for the next big opportunity. These shares appear to be giving longs a chance to do just that. Here are the six companies, which all have RSI levels around 70 or higher:

EOG Resources, Inc., (NYSE:EOG) shares are trading at $119.19. The RSI is about 70, which is at overbought levels. EOG is an independent oil and gas company based in Texas. The shares have traded in a range between $85.42 to $121.44 in the past 52 weeks, in fact the shares hit a new high today. The 50 day moving average is $107.62, and the 200 day moving average is $98.54. Since the shares are currently trading well over the 50 and 200 day moving averages, and close to the 52 week high, they could be due for a correction. Earnings estimates for EOG are just $3.42 per share in 2011, so the PE ratio is over 30. These shares appear ripe for a correction and the stock was downgraded today by Ticonderoga.

Olin Corporation (NYSE:OLN) shares are trading at $22.80. The RSI is about 83, which is at overbought levels. OLN is a specialty chemicals company and is based in Missouri. The shares have traded in a range between $14.35 to $23 in the past 52 weeks. The 50 day moving average is $19.58 and the 200 day moving average is $19.37. Since the shares are currently trading well over the 50 and 200 day moving averages, and close to the 52 week high, they could be ready to drop lower. Earnings estimates for OLN are $1.33 per share in 2011, so the PE ratio is about 20 times earnings, which is historically high for a chemical company.

Whole Foods Markets, Inc. (WFMI) shares are trading at $65.93. The RSI is about 77, which is at overbought levels. WFMI provides premium and organic foods in supermarkets nationwide. The shares have traded in a range between $33.96 to $65.99 in the past 52 weeks. The 50 day moving average is $57.46 and the 200 day moving average is $45.16. Since the shares are currently trading well over the 50 and 200 day moving averages, and close to the 52 week high, they could be ready to drop lower. Earnings estimates for WFMI are just $1.81 per share in 2011, so the PE ratio is about 35. These shares appear ripe for a correction at 35 times earnings. Insiders have been selling tens of millions of dollars of these shares in just the past few months.

Majesco Entertainment (NASDAQ:COOL) shares are trading at $3.25. The RSI is about 80, which indicates very overbought levels. COOL is a video game company based in New Jersey. The shares have traded in a range between 49 cents to $3.46 in the past 52 weeks. The 50 day moving average is $1.79 and the 200 day moving average is 97 cents. Since the shares are currently trading well over the 50 and 200 day moving averages, and close to the 52 week high, they could be ready to drop lower. Earnings estimates for COOL are about 20 cents per share in 2011. After more than tripling in the past few months, these shares appear ready for a pullback

Parker Drilling (NYSE:PKD) shares are trading at $7. The RSI is about 85, which is very overbought. Parker provides drilling services and is based in Texas. The shares have traded in a range between $3.43 to $7.10 in the past 52 weeks and hit the high today. The 50 day moving average is $5.02 and the 200 day moving average is $4.41. Since the shares are currently trading well over the 50 and 200 day moving averages, they could be ready to drop lower. Earnings estimates for PKD are just 31 cents per share in 2011, so the PE ratio is about 23. These shares appear ripe for a correction due the run they have had and the high PE ratio for a driller.

Travelzoo, Inc. (NASDAQ:TZOO) shares are trading at $68.48. The RSI is about 82, which is at very overbought levels. TZOO is a Internet company that offers travel and other deals online. The shares have traded in a range between $11.60 to $69.79 in the past 52 weeks. The 50 day moving average is $46.75 and the 200 day moving average is $32.15. Since the shares are currently trading well over the 50 and 200 day moving averages, and close to the 52 week high, they could be ready to drop lower. Earnings estimates for TZOO are $1.15 per share in 2011, so the PE ratio is about 60!

These stocks are looking very extended now. The combination of high PE ratios, and high RSI levels make these shares less likely to give investors the returns they have recently provided. Many of them hit new 52 week highs today, and therefore may have more momentum to the upside. However, the risk/reward ratio does not look good at these levels, and much of the gains for the past couple days could be temporary, end of the quarter window dressing by some funds.

The data is sourced from Yahoo Finance. The information and data is believed to be accurate, but no guarantees or representations are made. Rougemont is not a registered investment advisor and does not provide specific investment advice. The information contained herein is for informational purposes.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I may short COOL if it goes higher.