Sherwin-Williams —the paint manufacturer— is one of the oldest companies in the S&P 500, having been founded in the 19th century. Yet, its latest bull run just started in 2011 —when the stock rose from a low in the low-$70s to a high near $200 per share in May.

Since that ended, the price has declined to $167.20 as of Tuesday’s close, a 14 percent decline. Over the prior 30 days, the stock has been stuck in a range of $166.60 to $179.28. On Tuesday, the stock broke below the psychological level of $170, which should become resistance, along with additional resistance at the $177 level. The break below $170 also indicates that it may be due for a more-significant correction.

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LET’S LOOK AT THE NUMBERS

SHW’s short-term bearish technical indicators are confirmed by weak fundamentals, as well. Sherwin-Williams’ trailing price-to-earnings ratio stands at 25.85, above the industry average of 16.4 and above the S&P 500 average of 18.17.

OVERVALUED CLUES

I would like to highlight a couple fundamental reasons that SHW appears overvalued: debt-to-equity and EPS. First, SHW’s debt-to-equity ratio is at extreme levels (90.24), whereas, at Tradespoon, we only like to invest in companies with debt-to-equity less than 20. This is also high for the industry, which has a debt-to-equity average of 40. Earnings in the current quarter grew by 13.4 percent, slightly below the 15 percent threshold that we look for.

Sherwin-Williams is also trading above a P/E ratio that’s preferable. Over the last five years, the company’s shares have traded in the range of 10.93x to 30.92x trailing 12-month earnings, and the price is currently towards the top of that level. SHW’s current Price/Sales of 1.79 is above the average of its industry, of 1.22. The stock trades at higher P/E ratios than the two main competitors and the industry average and also has a highest PEG ratio. 

THE TRADE

Technical and fundamental indicators both show short-term bearish signals for SHW. 

To take advantage of a projected fall in the stock price, investors should consider the following debit put spread: Buy October 2013 $170 Puts at $7.40 and sell the October 2013 $165 Puts at $5.00 for a net debit of $2.40. At Tradespoon, we recommend holding until spread price reaches $4.90.