Overvalued Stocks Raise the Earnings Bar

NEW YORK (TheStreet) -- This week's earnings includes five key names representing four important overvalued sectors. We have an aluminum company and an agricultural products company in the basic materials sector, which is 4.6% overvalued.

We have an alcoholic beverage company in the consumer staples sector, which is the most overvalued sector by 24.4%. We have a heavy construction materials company in the construction sector, which is the second most overvalued sector by 19.4%. Finally, on Friday morning we get earnings from one of the four "too big to fail" money center banks with the finance sector overvalued by 13.5%.

Three of the five stocks profiled today are overvalued, one by a whopping 68.5%. Three have buy ratings according to www.ValuEngine.com and two have hold ratings. One is slightly lower over the past 12 months, while four had significant double-digit gains. Two of these gainers are up by slightly more that 79%, which is another sign that the earnings bar is set quite high.

The upside for these stocks over the next 12 months is disappointing versus the past year as the biggest potential gain is only 11.7%, and one of the biggest gainer is expected to be slightly lower. Two of the five have elevated trailing 12 month price-to-earnings ratios. All five stocks are significantly above their 200-day simple moving averages, which is the downside risk in 2013 on what many on Wall Street call a reversion to the mean.

Here are my buy-and-trade profiles for this week's earnings stocks:

Reporting before the open on Tuesday, Monsanto ( MON) ($96.11) is expected to earn 37 cents per share. This earnings bar is high as the stock set a multi-year high at $96.71 last week. The daily chart shows an overbought condition and the weekly chart is positive with the five-week modified moving average at $91.53. My quarterly value level is $89.86 with a weekly pivot at $96.92 and monthly risky level at $99.53.

Reporting after the close on Tuesday, Alcoa ( AA) ($9.26) is expected to earn 7 cents per share. Alcoa moved above its 200-day SMA at $8.88 last week raising this earnings bar. The daily and weekly charts are positive with the five-week MMA at $8.70. My monthly value level is $7.50 with a weekly pivot at $8.85 and semiannual risky level at $11.52.

Reporting before the open on Wednesday, Constellation Brands ( STZ) ($36.75) is expected to earn 55 cents per share. Constellation Brands set an all-time high at $37.57 last week so this earnings bar could not be any higher. The daily chart is positive, but the weekly chart is neutral as momentum is declining despite a weekly close solidly above the five-week MMA at $35.34. My annual value level lags at $30.65 with a weekly pivot at $34.37 and monthly risky level at $41.03.

Reporting after the close on Wednesday, Texas Industries ( TXI) ($55.60) is expected to report a loss of 34 cents per share. TXI set a multi-year high at $56.10 last week raising this earnings bar. Both the daily and weekly charts are overbought with the stock above the five-week MMA at $48.86. My monthly value level is $51.71 with my annual risky level at $61.58.

Reporting before the open on Friday, Wells Fargo ( WFC) ($34.94) is expected to earn 89 cents per share. WFC is trending below its multi-year high at $36.60 set on Sept. 14 and is trending above its Nov. 14 low at $31.25. Both the daily and weekly charts are positive with the stock above the five-week MMA at $33.88. My annual value level is $32.82 with an annual pivot at $34.17 and quarterly risky level at $36.83.

At the time of publication the author held no positions in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Richard Suttmeier has an engineering degree from Georgia Tech and a master of science from Brooklyn Poly. He began his career in the financial services industry in 1972 trading U.S. Treasury securities in the primary dealer community. In 1981 he formed the Government Bond Department at LF Rothschild and helped establish that firm as a primary dealer in 1986. Richard began writing market research in 1984 and held positions as market strategist at firms such as Smith Barney, William R Hough, Joseph Stevens, and Rightside Advisors. He joined www.ValuEngine.com in 2008 producing newsletters covering the U.S. capital markets, and a universe of more than 7,000 stocks. Richard employs a "buy and trade" investment strategy and can be reached at RSuttmeier@Gmail.com.

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