Oversold stocks are typically stocks that have recently traded lower in price and have built up the potential for a bounce. Of course, there’s no guarantee that a price drop will lead to a bounce. And even when there is one, this price bounce may not be immediate. Oversold stocks could decline even further before they find demand and start rising again.
So how should investors look for stocks like this?
The use of technical indicators such as the relative strength index (RSI) or the stochastic oscillator, can be used as a filter in a stock screener to find oversold stocks. Using that system, I have identified five oversold stocks that also have solid fundamentals and are also relative undervalued, compared to the broader stock market.
The five oversold stocks I have picked are the following:
- F5 Networks (NASDAQ:FFIV)
- Walgreens Boots Alliance (NASDAQ:WBA)
- The Kroger (NYSE:KR)
- Cisco (NASDAQ:CSCO)
- Credit Acceptance (NASDAQ:CACC)
Oversold stocks: F5 Networks (FFIV)
52-Week Range: $79.78 – $156.36
Current Price: $120.35, -23% off the high.
3-Month Performance: -12.1%
The recent tech stocks sell-off certainly presents buying opportunities for selective tech stocks like F5 Networks. A healthy and strong balance sheet, a current net margin of 13.95%, strong sales, and positive (and increasing) operating cash flows and free cash flows.
The latest earnings report was not bad. On the contrary, “F5 Networks reported third-quarter fiscal 2020 non-GAAP earnings per share of $2.18, beating the Zacks Consensus Estimate of $2.05. Moreover, the company’s quarterly earnings came in significantly higher than its guidance of $1.91-$2.13 per share.”
I also like the fact that through Q3, FFIV stock earned $485 million in operating cash flow. And if you’re a fan of buybacks, it purchased back $50 million worth of shares.
52-Week Range: $33.88 – $64.50
Current Price: $35.72, -46.6% off the high.
3-Month Performance: -17.4%
This pharmaceutical stock offers an attractive forward dividend yield of 5.2% or a dividend of $1.87 per share annually, and it is in a prolonged downtrend. Trying to catch a bottom or a falling knife seems too risky but there are some exceptions to this rule for investing purposes.
Now, it’s true — the prior earnings report was not good. The company missed on earnings and beat only slightly on revenue. And it wasn’t a small miss. “Walgreens’ bottom line plunged 44% to an adjusted 83 cents a share, while analysts were forecasting a 17% decline,” according to Investors Business Daily.
But this sharp decline in the profitability and the increase of the price-earnings ratio (TTM) to 43.8 is due to a very large degree to the pandemic business conditions. “Prior to the pandemic our financial performance for fiscal 2020 was on track with our expectations,” said Walgreens Boots Alliance CEO Stefano Pessina in the earnings news release.
The company has strong operating and free cash flows. And while profitability has taken a big hit, revenue continues to increase. A return to pre-pandemic business operations could improve profitability, and increase the stock price.
52-Week Range: $23.71 – $37.22
Current Price: $33.94, -8.9% off the high.
3-Month Performance: +5.8%
You may see that positive three-month performance and wonder why this one is on the list. But when you look at the past one month drop of -6%, it becomes clearer.
The consumer defensive stock has a low PE Ratio (TTM) of 9.9 and the latest earnings report topped second-quarter estimates. The company beat on both earnings and revenue, including a 35% surprise on the earnings.
A smart shift in the face of the pandemic buoyed these gains — online sales were a big part of the report. “Kroger’s (KR) digital sales soared 127% year-over-year driven by pandemic-led demand,” according to Smarter Analyst. “Same-store sales, without fuel, grew 14.6% year-over-year and beat the Street consensus of 10.5% growth. The company also authorized a new $1 billion share buyback program during the quarter.”
The key to investing is to wait for a major catalyst to buy or sell stocks. This is related to fundamentals. For Kroger, the better-than-expected earnings report and the buyback program are both key catalysts. And while the forward dividend yield of 2.19% does not seem impressive, it can add to the total performance should the stock rise in the coming months.
52-Week Range: $32.40 – $50.28
Current Price: $39.19, -22.1% off the high.
3-Month Performance: -13.2%
Cisco is an attractively valued tech stock with a strong balance sheet, very attractive profitability with a net margin of +22.75%, and a nice forward dividend yield of 3.7%. It’s a classic example of a stock underperforming the S&P 500, while the latest earnings report is a beat on both earnings and revenues. “However, the bottom line declined 4% year over year. Revenues declined 9% year over year to $12.15 billion but surpassed the consensus mark by 0.5%. The decline can be attributed to coronavirus crisis-induced weakness in the enterprise and commercial markets.”
I like the fact that Cisco has a Piotroski F-Score of 9, the maximum score which is associated with high-quality stocks and value stocks as well. Again, strong and positive free cash flows and operating cash flows, and a decline for the debt during the past two years, make the stock very attractive for a bounce.
Credit Acceptance (CACC)
52-Week Range: $199.00 – $539.00
Current Price: $303.28 , -43.7% off the high
3-Month Performance: -28.9%
And we end on a stock in the financial services sector. A look at the fundamentals and the latest earnings report is supportive of a potential stock price bounce. The stock beat on earnings, reporting $5.40, which was significantly above the expected $4.65. “Total revenues were $406.3 million, up 9.6% year over year,” according to Zacks. “The increase was largely driven by a rise in finance charges.”
The company has an impressive, long-lasting uptrend for both its revenue and earnings as of 2008. Yes, the debt level has also increased during that period. But the growth in sales, earnings, and earnings-per-share are hard to ignore. And the Piotroski F-Score is not bad either, it is six out of maximum nine points, another strong fundamental argument in favor of the stock.
Keep an eye on these five oversold stocks for a potential bounce for the rest of 2020.
On the date of publication, Stavros Georgiadis, CFA did not have (either directly or indirectly) any positions in the securities mentioned in this article.