The stock market has surged to all-time highs in 2019, and this broad market rally has been a rising tide that has lifted most boats. As a result, many of the market’s favorite stocks – think Facebook (NASDAQ:FB), Amazon (NASDAQ:AMZN), Shopify (NYSE:SHOP), Coca-Cola (NYSE:KO), McDonald’s (NYSE:MCD), so on and so forth — have similarly rallied to fresh 2019 highs.
Committing new money to stocks that are hitting all-time highs is tough to do. After all, we are taught as investors that stocks don’t go up in straight lines forever. Eventually, all-time high socks have to come back down to Earth. As such, I can’t blame anyone for not wanting to buy the market’s favorite stocks at new highs (though I think many of them will stay in rally mode for the foreseeable future).
That’s why I’ve put together a list of high quality stocks which aren’t trading at new highs. Instead, these are high quality, oversold stocks which have beaten and bruised in 2019 amid a record market rally. The rationale is that the relative under-performance in these names year-to-date creates potential for huge upside over the next few months.
In order to make the list, the oversold stock needed to have four key characteristics:
- High Quality: the core fundamentals of the company have to be strong and healthy and lend themselves to steady profit growth over the next several years.
- Bear Market: the stock needs to be in bear market territory, or 20% or more off 52 week highs.
- 10%+ Below 200-Day Moving Average: the stock needs to be substantially below its long term trend-line, or 10% or more below its 200-day moving average.
- Relative Strength Index <70: the stock needs to have not rebounded in a big way recently, so that the Relative Strength Index remains below near-term overbought territory.
With that in mind, let’s take a look at seven oversold stocks which have huge upside potential over the next few months.
Activision (ATVI)
% Off 52 Week High: 45%
% Below 200-Day Moving Average: 10%
14-Day Relative Strength Index: 44
Why It Dropped: Shares of video game publisher Activision (NASDAQ:ATVI) have dropped nearly 50% off their 52-week highs for two big reasons. First, the broader video game industry has slowed dramatically in 2019 after red hot growth in the prior several years. Second, Activision’s product line-up has been poor in this bad video game environment. The result has been sluggish top and bottom line growth trends for the past several quarters and a stock in free fall.
Why It Could Rebound: Demand is not a secular issue in the video game industry. Instead, demand is just cooling this year after multiple consecutive years of big growth and in the absence of new console launches. But the lap will get easier next year, and new consoles and cloud gaming platforms will launch, too. As such, video game demand should ramp back up over the next few quarters. At the same time, Activision’s content lineup in the second half of 2019 looks promising. This combination should ultimately breathe life back into Activision’s financial results and spark a big rebound in ATVI stock.
Foot Locker (FL)
% Off 52 Week High: 34%
% Below 200-Day Moving Average: 20%
14-Day Relative Strength Index: 48
Why It Dropped: Shares of athletic footwear retailer Foot Locker (NYSE:FL) have plummeted over the past few weeks thanks to what the market perceived as bad first-quarter numbers which showed signs of trade war headwinds. Specifically, margins came under pressure in the quarter, and management implied that such pressures would persist so long as tariff headwinds remained in place. As such, FL stock has been a big victim of trade war noise.
Why It Could Rebound: Foot Locker’s Q1 numbers were actually pretty good. Comparable sales rose nearly 5%. Gross margins expanded by 30 basis points. Operating margins fell only 10 basis points. Those are some of the best numbers this company has reported in recent memory, and it’s mostly because athletic apparel demand — specifically, Nike (NYSE:NKE) demand — remains red hot. Thus, once trade headwinds pass (they should improve over the next few months), FL stock will rebound in a big way.
Tesla (TSLA)
% Off 52 Week High: 32%
% Below 200-Day Moving Average: 10%
14-Day Relative Strength Index: 69
Why It Dropped: Shares of electric vehicle maker Tesla (NASDAQ:TSLA) were severely beaten and bruised in early 2019 as poor Q1 delivery numbers spooked many investors into thinking that the best of the Tesla growth narrative had already come and gone.
Why It Could Rebound: Strong Q2 delivery numbers proved that the best of the Tesla growth narrative hasn’t already come and gone and that bad Q1 results were an anomalous byproduct of unusually weak global EV demand (which was catalyzed by a plethora of factors, most of which won’t repeat going forward). Over the next several quarters, Tesla’s numbers will continue to improve thanks to better Model 3 delivery logistics in Europe and Asia and Model S and Model X refreshes. As those numbers get better, TSLA stock will bounce back to $300-plus prices.
Canopy Growth (CGC)
% Off 52 Week High: 38%
% Below 200-Day Moving Average: 15%
14-Day Relative Strength Index: 33
Why It Dropped: There’s been a lot of noise in the cannabis industry recently, headlined by growing inventories and rumors of weaker-than-expected demand going forward. At Canopy Growth (NYSE:CGC), that noise has coupled with operational issues (the company’s second quarter numbers weren’t too great) and executive turmoil (Canopy’s co-CEO was recently fired). All of these issues have come together to spark a near 40% sell-off in CGC stock over the past few weeks.
Why It Could Rebound: CGC stock will rebound into the end of 2019 for four reasons. First, executive turmoil will pass as Canopy moves forward with a new CEO. Second, Canadian cannabis market sales trends will improve meaningfully over the next few months because it appears that supply issues are resolved. Third, investors will want to buy into CGC stock ahead of the December legalization of edibles in Canada. Fourth, U.S. legislation should continue to progress towards nationwide legalization, thereby further opening the door for Canopy to extend its dominance into the U.S. market.
Netflix (NFLX)
% Off 52 Week High: 20%
% Below 200-Day Moving Average: 10%
14-Day Relative Strength Index: 23
Why It Dropped: Shares of global streaming giant Netflix (NASDAQ:NFLX) crashed in July because the company missed on the only number that mattered in its Q2 earnings report — global streaming adds. And they didn’t just narrowly miss — they missed by the widest margin ever. Investors freaked out, thinking that the best of Netflix narrative is already over, and that forthcoming competition in 2020 will only further flatten out this company’s growth trajectory.
Why It Could Rebound: The world is still pivoting to streaming TV. Netflix is still the undisputed leader in streaming TV. Bad second-quarter numbers were just a hiccup in a still healthy secular growth narrative. Next quarter’s numbers are expected to be “back to normal”. Given that management never misses on sub guidance in back-to-back quarters and that the summer content slate is very good for Netflix, next quarter’s robust sub guide seems very doable. When Netflix does report very good third-quarter numbers, NFLX stock will bounce back in a big way.
AMC Entertainment (AMC)
% Off 52 Week High: 52%
% Below 200-Day Moving Average: 27%
14-Day Relative Strength Index: 54
Why It Dropped: The world’s largest movie theater operator AMC Entertainment (NYSE:AMC) has struggled in 2019 as box office results have been sluggish. Despite Avengers: Endgame becoming the best selling movie of all time, first half 2019 box office revenues were still down more than 9% year-over-year. Investors have interpreted this as further evidence that the movie theater industry is dying. AMC stock has consequently dropped to multi-year lows.
Why It Could Rebound: The movie theater industry isn’t dead. Consumers still enjoy going to the movies because it’s a fun experience. That’s why annual ticket sales have bounced in the 1.2 billion to 1.5 billion tickets range for the past decade. First half 2019 was just a down period in that range. Second half 2019 is shaping up to be better. Month-to-date, box office revenues in July are up nearly 10% year-over-year. The upcoming releases of a new Frozen movie and a new Star Wars movie should allow this renewed growth to persist. As it does, AMC stock will bounce back.
CVS (CVS)
% Off 52 Week High: 30%
% Below 200-Day Moving Average: 12%
14-Day Relative Strength Index: 50
Why It Dropped: Shares of CVS (NYSE:CVS) have been under pressure for the past several years because the company’s core fundamentals have consistently deteriorated. The retail pharmacy business has been hit by increasing competition, and the threat of Amazon entering the space and disrupting the whole industry. Meanwhile, the PBM business has been hit hard by adverse legislation, which has pressured sales, reach, margins and profits.
Why It Could Rebound: The fundamentals in both the retail and PBM businesses could improve meaningfully over the next few months. On the retail side, industry-wide consolidation is easing competitive pressures, and the numbers at CVS have started to improve (3.8% gain in same-store sales last quarter, a 1.2% gain in front-store sales and 140 basis points of market share expansion). On the PBM side, U.S. President Donald Trump just agreed to scrap a proposed PBM rebate overhaul that would’ve presented a huge revenue and profit headwind for PBMs everywhere. Broadly, then, the trends underlying CVS are finally starting to improve, paving the path for a big rebound rally in CVS stock.
As of this writing, Luke Lango was long FB, AMZN, SHOP, ATVI, FL, NKE, TSLA, CGC, NFLX, AMC and CVS.
