How does an investor judge oversold stocks?

Often, they’ve been sold lower for a reason. However, if you look at historical patterns and future estimates, you can make sound judgments about the next direction of these stocks.

Benjamin Graham said the intelligent investor is a realist who sells to optimists and buys from pessimists. While this doesn’t apply to all stocks, many oversold stocks on the market seem primed to rebound considerably over the coming years.

The market rally is not broad-based, and I see many businesses that are sitting at bargain-basement levels with huge upside potential as their businesses make a turnaround. Once they execute and grow as expected, I believe they could quickly deliver market-beating returns.

So let’s examine three stocks that are down a whopping 70% to buy on the dip for maximum returns before they climb again.

Trupanion (TRUP)

Trupanion (NASDAQ:TRUP) provides medical insurance for cats and dogs across the U.S. and Canada. Despite the stock being down over 80% from its highs, I believe it’s an attractive buy. At these levels, long-term investors can capitalize on the booming pet ownership trend.

Roughly 7 million Americans plan to get a pet this year, and surveys show younger generations increasingly prefer pets over having kids. Trupanion is well-positioned to benefit from this megatrend. In Q1, revenue surged 19.4% year-over-year (YOY) to $306.1 million, beating estimates by $5.6 million. While still unprofitable, losses narrowed to just 16 cents per share, 4 cents better than expected.

Analysts expect revenue will grow another 13.8% for the full year 2024. And although profitability remains elusive for now, Trupanion expects to turn the corner in 2026. With the stock beaten down to more reasonable valuations, patient investors can ride Trupanion’s growth to solid returns in the coming years as pet insurance adoption continues accelerating. The long-term trends are undeniably in Trupanion’s favor.

TechTarget (TTGT)

TechTarget (NASDAQ:TTGT) provides purchase intent data and marketing services to enterprise technology vendors. The software market is booming, with data-focused companies seeing explosive profits. But TechTarget has unfortunately struggled with its financial metrics in the red. However, a significant opportunity for this oversold stock to rebound in the near future could be looming.

Management forecasts Q2 revenues of $57-59 million, representing a 12% sequential increase from Q1 and roughly flat YOY growth. This stabilization supports my view that the worst may be behind TechTarget. Analysts expect the company to return to growth this year with solid $1.8 EPS. Then, it is anticipated to accelerate into double-digit growth in 2026 with 15% EPS growth and over 10% sales growth.

While 10-15% growth may seem modest, software companies with reliable profits and low-double-digit revenue increases often command much higher valuation premiums. If TechTarget can execute on these projections, I believe the stock has substantial upside potential. With shares down exactly 71% from highs (as of writing), this could be an attractive opportunity to buy the dip before the rebound gains steam.

Data I/O Corporation (DAIO)

Speaking of data, Data I/O Corporation (NASDAQ:DAIO) looks like a compelling, high-risk, high-reward bet for those willing to ride out the volatility. In Q1, the company delivered extremely strong bookings of $8.1 million. It was the highest level in 11 quarters, driven by major wins in EMEA.

While near-term sales may be lumpy due to geographical rotation, the long-term edge AI tailwinds in ADAS, IoT, healthcare and smart factories bode well for DAIO’s programming solutions.

I believe DAIO has the right ingredients to capitalize on the booming data market. Yes, we’ve endured ups and downs. But with the stock down over 70% from its highs, this feels like a classic trough before the next upcycle. Analysts seem to agree.

Also, experts see EPS surging from 10 cents in 2024 to 30 cents in 2025, implying a mere 10x forward 2025 P/E for a company expected to grow sales by 14% next year. Therefore, it is definitely an oversold stock you should consider.

On the date of publication, Omor Ibne Ehsan did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.