Recruitment firm stock is 'unsustainable'

By Graeme Dickson
Updated: 07:45 EDT, 16 June 2011

When it comes to price to earnings ratios, only a relatively small proportion of FTSE 350 companies have ratings over 25 times current earnings.

If you take into account the stock we are looking at, has a historical price to earnings ratio of 34.5 and that it has just recorded a 'dead cross', where the 20 day exponential moving average (the red line below) has just downwardly intersected the 50 day exponential moving average, the company, SThree (STHR) looks like a prime candidate to dump:

SThree is a recruitment company with specialisations in Banking & Finance, Energy & Natural Resources, Healthcare and Pharmaceutical industries.

It has 54 offices in 14 different countries and boasts that 60 per cent of its profits come from overseas.

I cannot knock the company's achievements where pre-tax profits have grown by 20 per cent to £21.6 million in its last financial year with earnings per share up 25.3 per cent to 11.9p.

However, when reality knocks on the door that it is valued on an unsustainable basis, then unless it can rapidly justify its rating with bumper profits, the shares could be vulnerable to a fall.

That said Michael Page (MPI) and Hays (HAS) also have lofty ratings, so the sector is definitely running on a high.

Expect resistance to come in at 420p and then 450p.

Otherwise watch out for support at 350-360p: through here possibly to as low as 290-300p, where the 200 week exponential moving average is.

Update

Hochschild (HOC) - tipped as a sell at 515.5p, the shares closed at 521.5p. Hold for now given the rich rating it has relative to the issues it has regarding production in Argentina.

Premier Oil (PMO) - tipped as a sell at the equivalent of 480.25p, the shares closed at 467.4p. Continue to hold.

QinetiQ (QQ.) - suggested to sell at 121.1p, the shares closed at 115.4p. Keep the stop at 135p while targeting 95-100p.

Inchcape (INCH) - suggested to sell at 358.9p, the stock closed yesterday at 383.7p. Sit tight for now - if it closes above 415p, cut the position.

Smith & Nephew (SN.) - suggested to sell at 676.5p, the stock closed yesterday at 672p - the stock has perked up since it issued its Q1 results. Nonetheless keep the stop based on a close above 700p.

Carpetright (CPR) - suggested to sell at 636p, the stock closed at 702.5p - surprising given the multitude of profit warnings. Watch out for resistance at 755-760p.

Aveva (AVV) - suggested to sell at 1591p, the stock closed yesterday at 1571p. Keep the stop at 1675p.

The writer does not hold any shares or derivatives in the above mentioned companies. The material for this report comes from Sharescope.