The 10 most overbought and oversold ASX 200 stocks – Week 49

Iress (ASX: IRE) shares have rallied a little over 25% in the last three sessions after a strategy update outlined further balance sheet deleveraging, stable revenue and an FY24 earnings upgrade.

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 83.

The Most Overbought Stocks

'Target price' is an aggregate of broker target prices from Refinitiv. Data of Friday, 1 December 2023 close.

Iress' Comeback Story

Iress was one of the worst performing stocks during August reporting season. On August 21, the company announced:

• Dividend suspension: “Iress has made the prudent decision to suspend its interim dividend and reduce debt at a time when it is incurring high one-off costs from the Company’s transformation plan.”

• Softening revenue growth and cost pressures building in the second half of 2023

• Underlying EBITDA guidance lowered to be broadly flat half-on-half

Between August 18 and October 30, the stock fell as much as 51% to levels not seen since April 2009. It's now kicking off the comeback story, with the company's strategy and guidance update noting:

• Full-year adjusted EBITDA to be between $123-128 million vs. prior guidance of $118-122 million

• Second half revenue growth of 2.6% on first half, slightly ahead of prior expectations and cost base to be more favourable due to lower staff costs

• Net debt reduced from $375 million as at 30 June 2023 to $308 million at 31 October 2023

Brokers remain optimistic about the company's progress, acknowledging that the turnaround strategy is underway but still in its early stages. While short-term execution risks persist, the core revenues appear stable and trends are not as unfavorable as previously anticipated. Cost-cutting initiatives have been largely successful and further progress should contribute to margin improvement in FY24.

Asset sales remain a crucial focus for analysts, as the potential sale of UK businesses could significantly reduce outstanding debt. Further asset divestments are likely in the near future, allowing the company to focus on core high-margin and high-revenue recurring businesses.

The Most Oversold Stocks

'Target price' is an aggregate of broker target prices from Refinitiv. Data of Friday, 1 December 2023 close.

AGL in Freefall

AGL shares have fallen 12 of the last 13 sessions to a 6-month low. This weakness is largely associated with the ongoing Origin Energy and Brookfield takeover, which has weighed on both Origin and AGL valuations. Here's the recent series of events:

• November 2: AustralianSuper plans to vote against the increased offer from Brookfield, which caused Origin shares to sell off 6.6%

• November 3: Brookfield seeking new talks with AustralianSuper

• November 13: AustralianSuper rejects offer to join Brookfield as buyers of Origin and believes the offer remains substantially below its estimate of Origin's long-term value

• November 23: Brookfield makes a revised offer at $9.08 per share, comprising:

  • $5.25 per share from the estimated post-tax sale proceeds of the Energy Markets division

  • $3.83 per share via a mix of Australian and US dollars

• November 30: Origin Energy board considers the revised offer as not in the best interest of the company or its shareholders

• December 4: The Australian reports that shareholders voted 66.9% in favour of the deal, short of the required 75%

Why does this matter: Brookfield offered $9.53 per share on November 3, which valued the business at a price to earnings of around 14x. They were willing to pay around 20x in late 2022. As the deal fails to fall through, it will now come down to fundamentals for the stock to hold up. And quite clearly, the stock (and its peer AGL) is experiencing a de-rating after the takeover bid held its share price up for so long.

Origin (red) vs. AGL Energy (blue)