Once a major catalyst is in play, a stock can remain in overbought or oversold territory for an extended period. While an overbought stock may appear too expensive, more often than not, it may continue to climb even higher. We'll explore this phenomenon with examples from Sigma Healthcare and The Star below.
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.
Sigma Healthcare was the most overbought stock on the S&P/ASX 200 last week, with an RSI of 87, while The Star Entertainment Group sits on the opposite end with an RSI of just 12.
Ticker | Company | RSI | 1-Month % | Close Price |
---|---|---|---|---|
Sigma Healthcare | 87 | 61.9% | $2.04 | |
Siteminder | 76 | 26.9% | $6.22 | |
Sandfire Resources | 75 | 32.2% | $10.77 | |
South32 | 70 | 21.1% | $3.68 | |
Hub24 | 70 | 8.9% | $59.88 | |
Ansell | 70 | 7.6% | $32.15 | |
Deep Yellow | 69 | 51.3% | $1.51 | |
Mineral Resources | 68 | 58.4% | $50.99 | |
Pro Medicus | 68 | 17.3% | $179.02 | |
Lifestyle Communities | 68 | 21.4% | $8.90 |
Sigma Healthcare experienced a significant 23% one-day rally on Tuesday 1 October, following the healthcare group's proposal of three major concessions to facilitate its $8.8 billion merger with Chemist Warehouse. These concessions would allow Sigma's other franchisees, such as Amcal, who joined at the start of 2024, to opt out of their agreements without penalties for the next three years. The ACCC is currently initiating a public consultation process regarding these proposed concessions.
This news was viewed as a net positive, as the ACCC is not denying the merger but rather, running the ruler over key details.
The rally continued over the next two days, with Sigma gaining an additional 16.7%, bringing the total gain to 43% or approximately $1 billion in market value. This three-day surge may be attributed to various factors, including index buying, market expectations of a successful merger, short covering, and momentum.
At a market cap of $3.3 billion, Sigma is trading at approximately 64 times Macquarie's forecasted FY25 underlying earnings, which is considered expensive. However, the market may be overlooking valuation as all focus is on the ACCC's approval of the merger.
Ticker | Company | RSI | 1-Month % | Close Price |
---|---|---|---|---|
Star Entertainment Group | 12 | -41.1% | $0.27 | |
Premier Investments | 31 | -12.8% | $30.57 | |
Bendigo and Adelaide Bank | 32 | -3.4% | $11.42 | |
Webjet | 33 | -9.3% | $6.91 | |
Spark New Zealand | 33 | -12.5% | $2.88 | |
IPH Limited | 34 | -6.3% | $5.69 | |
Westpac | 34 | -4.6% | $30.14 | |
Coles Group | 34 | -3.6% | $17.74 | |
Amotiv | 36 | -0.7% | $9.93 | |
Westgold Resources | 36 | -13.8% | $2.50 |
Meanwhile, The Star has emerged as the most oversold stock on the market for the second consecutive week. The stock plummeted 44% on Friday, 27 September, after resuming trade following a month-long suspension due to delayed full-year results. Last Thursday, the company reported a significant loss of $1.69 billion, citing challenging and deteriorating trading conditions across all properties.
Despite being dramatically oversold, The Star's stock has only rebounded by about 8% since Friday. Barrenjoey reportedly values Star Entertainment's flagship Sydney casino at just $8 million, a stark contrast to other assets like the Brisbane Queen's Wharf complex, valued at $1 billion.
The company has reported losses of $4.5 billion over the past two years and faces large debts as well as higher compliance costs due to regulatory issues. Barrenjoey analysts expects the company to post losses for years, reducing revenue forecasts by 20% and earnings by over 80%.
Separately, banks have started to dip into oversold territory as US rate cuts and China stimulus have driven a rotation into the resources sector. Morgan Stanley analysts maintain a negative stance on major banks, noting that current trading multiples and earnings estimates already account for potential benefits of rate cuts, economic rebound, and other positive factors.
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