The FTSE 100 closed at an 11-month high yesterday, boosted by a share price surge of tech company ARM Holdings (ARM) after its agreement on a £24.3 billion cash takeover deal by Japan’s SoftBank Group.
The blue-chip index, which made up of UK’s largest 100 companies, ended 0.4% higher at 6695.42 on Monday. The surging share price of ARM holdings, which designs chips used in smartphones and other connected devices, is the main driver of the index rout. ARM closes at 44% higher to 1714.21p on Monday.
ARM said the takeover is a "great deal for the UK" as its suitor pledged to double the company's UK workforce and keep the firm at its Cambridge headquarters.
“This would be the largest ever Asian investment into the UK. Big vote of confidence in British business,” Philip Hammond said on his Twitter account on Monday morning.
It was reported that Masayoshi Son, chairman and chief executive of the Japanese Softbank group, said the deal highlighted his vote of confidence in the British economy following a Brexit vote in June.
Is it Time to Crystallise Gains?
The FTSE 100 has been in recovery mode over the past few weeks following an initial fall after Britain voted to leave the EU on June 23. The FTSE 100 is up 9.9% so far this year. However, ongoing challenges and uncertainties following a Brexit vote could drive further market volatility. But the recent rally does mean that some companies in the FTSE 100 are trading above their fair market value; this may be an opportunity to use gains to invest in other less-pricey stocks.
Morningstar analysts assign stocks with star ratings that can help investors determine whether a particular stock or company is overvalued. If a stock has a one-star or two-star rating, that means Morningstar equity analysts think the shares are overvalued, and the share price could drop in the future.
There are currently three UK stocks that Morningstar equity analysts rate one star, and we highlight them along with Morningstar analyst research. They are all within the mining sector.
3 Overvalued UK Mining Stocks
Rio Tinto (RIO) is the world’s lowest-cost iron ore miner and it was one of the few miners that are profitable throughout the commodity cycle, said Morningstar equity analyst Mathew Hodge. The stock has gained 29.4% year to date. However, as Rio Tinto’s large iron ore expansions coincided with the peak of China boom, its returns are likely to remain below the cost of capital over the long term, Hodge said.
“As a commodity producer, Rio Tinto is a price taker, not a price maker. The company’s lack of pricing power is aggravated by the volatile and cyclical nature of commodity prices,” said Hodge.
Another global mining giant Anglo American (AAL) was also on the list of one-star overvalued stocks by Morningstar analysts.
Anglo has significant exposure to copper, coal, and iron ore, but it is unique in its significant platinum output, which accounts for roughly 40% of the annual global supply. The company’s huge platinum business should benefit from rising household incomes that bolster Chinese demand for automobiles and jewellery, which are categories that collectively account for 84% of platinum and palladium use in China, Morningstar analyst David Wang said.
He explained as China rebalances away from infrastructure and construction-led growth, long-lagging Anglo American will find itself better positioned than most diversified peers. The stock gains 199.4% year to date.
However, persistent problems over labour unrest, periodic calls for nationalisation, and electricity in South Africa, which have weighed on its profits in recent years, cast doubts over future profits and Anglo's rights to those profits. While Anglo has taken steps to improve its financial position by slashing capital expenditures and suspending the dividend, profitability at many of its mines will remain challenged, Wang said.
Royal Dutch Shell (RDSB) is also rated by Morningstar analysts as an overvalued stock. The stock is up 37% year to date. In the current market environment of high costs and low oil prices, Shell faces extremely challenged operating conditions where cash flows are way below capital spending and dividends, and new investment is not value-creative, Morningstar analyst Stephen Simko said. He added that Shell's oil and gas production involves operating in politically unstable regions where leaders or members of its population can be hostile toward Western energy firms.
