The 10 most overbought and oversold ASX 200 stocks – Week 30

Capital raisings, disappointing quarterly updates and weak commodity prices have pushed numerous resource stocks into oversold territory – including heavyweights like Paladin Energy, South32, Fortescue and Woodside.

The 14-day Relative Strength Index is a momentum indicator that measures the magnitude and speed of recent price changes to assess whether or not a stock is overbought or oversold.

An RSI of 70 or above is considered to be overbought, which means the stock is rising too quickly and likely to experience a pullback. Meanwhile, an RSI of 30 or below is considered to be oversold, which means the stock is falling too quickly and is likely to experience a rebound.

Based on this indicator, Iress is the most overbought stock on the ASX 200 with an RSI of 84 while South32 is the most oversold with an RSI of 22.

Most Overbought ASX 200 Stocks

Target price' is an aggregate of broker target prices from Refinitiv. Data as of the close on Friday, 26 July 2024

Iress rallied 17% last week after an update positioned the company at the higher end of its FY24 EBITDA guidance range of $112 million to $122 million (excluding divested mortgage business), up approximately 50% from the prior corresponding period.

A key development was the announced sale of the UK mortgages business for $164 million, set to conclude by August 1, 2024. This divestment is expected to strengthen the company's balance sheet and free up resources for growth initiatives.

The market reacted positively, with Iress shares jumping 9.3% on the announcement day (Monday, July 22) and gaining another 7.0% over the rest of the week. Some of the key takeaway from analysts include:

• Macquarie: Retained a Neutral rating but hiked target to $9.70 from $8.85

• Jefferies: Flagged underperformance of the superannuation segment but expects improvement. Retained Hold rating but raised target to $9.10 from $8.70

• Morgans: Expect to see further earnings improvement in the second half of the calendar year. Retained a Hold rating but raised target price to $10.74 from $9.85

• JPMorgan: Remains constructive with further catalysts to come. Maintains Overweight rating and raised target to $10.20 from $8.80

Despite potential overbought conditions, Iress shares may continue their upward trajectory following the unexpected guidance upgrade, successful (and ongoing) transformation program and the positive response from brokers.

Most Oversold ASX 200 Stocks

Target price' is an aggregate of broker target prices from Refinitiv. Data as of the close on Friday, 26 July 2024

South32 has wound up as the most overbought stock on the ASX 200 after its quarterly report revealed a substantial impairment and a downgrade in FY25 production guidance. Some of the key highlights from the report include:

• Environmental Protection Authority of Western Australia imposed new conditions on the Worsley Alumina mine

• South32 will write down $830 million (US$389 million) from its alumina business value

• FY25 production guidance cuts: alumina by 5%, copper by 7%, and zinc by 9%

These negative factors overshadowed stable production in other segments, with analysts noting mixed results across commodities.

Macquarie maintained an Outperform rating but reduced their target price by 11% to $4.00, cutting FY24 and FY25 earnings forecasts by 28% and 14% respectively due to weaker guidance and higher costs. They see upside potential with South32 trading at 3.5/3.3-times FY25/26 EBITDA multiples after Monday's correction.

However, the stock's seemingly cheap valuation comes with significant risks. Morgan Stanley notes that despite Worsley's substantial resources (approximately 700 million tonnes with a mine life of up to FY60), the recent issues and impairment suggest major changes to the mine plan and likely negative impacts on operating costs.

While South32 is expected to receive $2.5 billion from the sale of its met coal assets in the first half of FY25, Morgan Stanley highlights that group capex remains above US$1 billion for FY25 and FY26. This may discourage management from implementing a buyback. Analysts currently expect a US$100m buyback in second half of FY25 but see risks to this assumption.

These significant challenges often contribute to keeping the stock in oversold territory for an extended period.