Beware Blackmores euphoria

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Blackmores Limited (BKL) is one of my favourite fundamental stocks. The reason is obvious from the chart, however the main reason is that BKL has continuously increased its dividend for many years. However, I am also a realist and understand that euphoria also happens in the market, just as fear does. In fact, there often comes a time when euphoria turns to fear.

It is my view that the recent price action in BKL has reached euphoric proportions. And its trailing fundamentals support this with a PE Ratio of 60 and a dividend yield of 1.2%. Whilst the future potential for BKL’s business may certainly exist, such a rise in a stock’s price in a relatively short period of time is unsustainable without a serious pullback, possibly in the order of a minimum of a 38.2% retracement, a 50% or even a 61.8% retracement of the last major run-up. Such pullbacks would take BKL back down to $131, $110 or $89, respectively. Having had four 61.8%, or more, retracements in the past 30 years and just one 38.2% retracement after major run-ups, the odds may be in favour of a 61.8% retracement.

The semi-log chart below also shows how far BKL has risen above its long-term trend channel.

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