UK Markets closed

3 potentially overvalued FTSE stocks I’d still consider buying on a dip

Kirsteen Mackay
Arrowings ascending on a chalkboard

While worldwide worries have prevented many stocks from thriving in 2019, a select few have defied expectations and done extremely well. Positive sentiment drives buyers to these stocks, but it can also result in them becoming overvalued, when they become too expensive for their own good.

I think this is the case for several such successes in recent months, but there are still a few I’d take my chances with, particularly if the share price drops.

From the FTSE 100, I’d choose global pharmaceutical giant Astrazeneca (LSE:AZN), while from the FTSE 250, I’d choose Future (LSE:FUTR), an international media group and digital publisher, and JD Sports Fashion, the sports retailer.

Health for wealth

Astrazeneca has had an exceptionally good year. Its share price has risen over 27% since January.  This is thanks to several positive developments in its drug research and commercialisation.

It specialises in the treatment of diseases in the areas of oncology, cardiovascular, renal and metabolism, and respiratory.

November alone was impressive. Its drug Imfinzi was granted FDA Priority Review for the treatment of patients with extensive-stage small cell lung cancer, an aggressive, fast-growing form of lung cancer. Calquence, a leukaemia drug, was approved in the US for adult patients, Qtrilmet was approved in the EU for the treatment of type-2 diabetes, and the FDA accepted a New Drug Application and granted Priority Review for Selumetinib, as a potential new medicine for paediatric patients with NF1, a rare and incurable genetic condition.

This pharma favourite has a trailing price-to-earnings ratio (P/E) of 47 and its dividend yield is 2.9%. Earnings per share are £1.31 and its debt ratio is 68%.

Future returns

Customer loyalty has contributed to record revenue growth for Future and according to the London Stock Exchange, its e-commerce clicks soared 44% year-on-year following Black Friday 2019.

This publishing giant’s top online properties include technology sites TechRadar, GamesRadar, and Tom’s Guide. Leading products advertised and sold through these sites on Black Friday included Google’s Pixel 4 smartphone, and the Sony Playstation VR, as well as subscriptions to streaming services such as Hulu and Disney+.

The relevance and trusted nature of these sites give consumers the confidence to shop online as the sites offer expert buying advice across consumer categories such as tech, games, music, homes, and more.

Future has recently announced two major acquisitions; a £140m acquisition of TI Media, a UK-based print-let consumer magazine and digital publisher with brands such as Marie Claire and World Soccer. This preceded the £23.5m acquisition of Barcroft Studios, creator of digital video and television content.

Future has an astronomical trailing P/E of 138. Its dividend yield is a very low 0.14% but the cover is more than 10 times. Earnings per share are 9p and its debt ratio is a low 12%.

Sporting hero

JD Sports Fashion has a P/E of 28, so not as high as the previous two. Its dividend yield is a very low 0.22% but it has a dividend cover of 15 times, which means it could increase if the company continues to thrive. Earnings per share are 26p.

It’s important to note that these stocks are currently overvalued, so I think they’re worth watching for the possibility to buy on a dip, but I wouldn’t rush out and buy them at today’s prices.

More reading

Kirsteen has no position in any of the shares mentioned. The Motley Fool UK has recommended AstraZeneca. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2019