As we know, the stock market has charted something of a “V” pattern since early December, with the bottom point having occurred around Christmas. And right now, the S&P 500 is within a whisker of the early December high, the point from which the market started to draw the downward portion of the “V.” So it’s easy for casual observers to assume that the market’s rally is finished. Maybe that’s so. Maybe it’s not. In either case, there are ways to look for buyable stocks.
Screening for Strong But “Oversold” Stocks
Oversold is a word that’s well known in technical analysis circles but which those who are familiar with my work may find a bit misplaced in an article written by me. After all, I’ve been a committed fundamental practitioner since I got started way back in 19-you-don’t-need-details. Like many similarly situated novices, I was and in many ways still am all in on Graham and Dodd and other fundamental gurus of the day, and I kept it going over the years including in the mid 1990s (while I was at Value Line), having been the first analyst to launch regular coverage of Berkshire Hathaway (BRK), which included the opportunity to get starstruck as I spoke to Mr. B himself regarding my quarterly updates.
But rather than seeing fundamentals as being opposed to technicals, I see them as working hand in hand. Fundamental analysis tells you about the company. Technical analysis tells you about the collective thought process of market participants who are reacting to company characteristics, events, etc. Think of it as reading the “invisible hand,” not the traditional invisible hand that we’ve all been taught operates to balance supply and demand in the market for goods or services, but the invisible hand that brings supply and demand for shares together. Studying this invisible hand can do much to alert you to ides that it hadn’t previously occurred to you to look for, provide feedback confirming your ideas are likely sound or suggesting you might have missed something and may need to revisit your thesis, and for one like me who works primarily with data, cueing me into the role being played by qualitative factors.
Putting both technical and fundamental analysis to work, I used the Chaikin Analytics screener to search within a universe built to resemble the Russell 3000 constituent list to find good stocks that have become oversold. If the market rally persists, these stocks can be expected to strengthen again once the factors that led to the oversold condition pass, as they usually do. If, on the other hand, the market does tire out, I’d rather start a decline holding oversold stocks as opposed to those that have been driven up to a point where they are ripe for “mean reversion” (i.e., overbought). Either way, it’s important to have other reasons to be bullish, as are built into the screen:
- Bullish Chaikin Power Gauge rating: This one factor covers a lot of core analytic territory including basic fundamental, valuation and earnings trends.Starting here completely removes the screen from the realms of tea-leaf reading or other pejorative notions that might be associated with technical analysis.
- Stock price above Rising Long-Term Trend: All rating systems are the result of statistical analysis, and in statistics, favorable and unfavorable outcomes coexist. That’s fine when we examine output in the aggregate, as long as favorable outcomes predominate over unfavorable ones. But when looking at an individual stock, it helps to have some independent reason to assume the probabilities favor this particular stock being in the favorable-outcome camp. When the long-term trend (defined in Chaikin Analytics as the 200 day Double (extra smoothing) exponential moving average (a version that gives more weight to recent price movements) is rising for a favorably ranked stock, it means Mr. Market has thus far been acting toward the stock the way the rating assumed he would. And when the current price is above this trend, this signifies that thus far, the scenario remains valid.
- Stock is Oversold: I would not be bullish on badly-ranked declining-trend oversold stocks. But when an oversold reading is combined with the two above-mentioned tests, that suggests a good entry point into a generally strong stock. Think of it as boarding a train, but not by jumping on while it’s still moving (as is often done in the movies) but by waiting for it to come to a full stop in the station. (Continuing the analogy, buying an oversold but poorly-ranked stock that’s in a downtrend is like boarding a different train that’s stopped in the station, but instead of quickly resuming the trip, that train is being taken out of service and will most likely crawl toward a repair yard.)
- Stock is Mid-Cap or Large-Cap: By eliminating small caps, I’m playing a bit of defense in case the market decides not to extend the upper leg of the “V” pattern. I see size as part and parcel of the Quality factor, with smaller size implying lower quality and greater potential future volatility.
Here are five of the nine stocks that pass this screen today along with their Chaikin Analytic price charts. In addition to satisfying the screening requirements, these stocks also have positive tallies for Relative Strength versus the S&P 500 SPDR ETF (SPY); this being what we regard as a “bullish personality”. (NOTE: Four other stocks passed but were neutral in terms of personality: Electric utilities Ameren Corp. (AEE) yielding 2.70%, Northwestern Corp, (NWE) yielding 3.47%, Portland General Electric (POR) yielding 2.93%, and gas utility Spire (SR) yielding 3.07%.)
You can interpret the charts below in isolation, or, as I recommend, read them from the bottom up through a four-phase process I describe here that’s designed to help you use the charts to develop a comprehensive stock story.
Euronet Worldwide (EEFT)
This company provides payment and transaction processing solutions. Its EFT Processing segment provides ATM and point-of-sale (POS) machines as well as ATM and POS dynamic currency conversion.The epay segment provides distribution, processing, and collection services for prepaid mobile airtime and other electronic payment products; and vouchers and physical gift fulfillment, and gift card distribution and processing services. The Money Transfer segment provides consumer-to-consumer money transfer services. The company continues to grow briskly as it expands its networks (although recent changes in the way revenue are accounted for in the epay segment make growth appear flattish). The company is well positioned in Eastern Europe and other developing economies, where many transactions are still done in cash, suggesting continuing opportunities for strong growth.
Lexington Property (LXP)
This is a REIT that’s undergoing a significant structural change. Late last year, it exited the suburban office area and is now entirely focused on ownership of single-tenant net-leased commercial properties across the United States; generic structures that can easily be repurposed as warehouses or distribution centers. The stated yield on most web site is around 7.5%, based, as is usually the case, on an assumption that the latest dividend is representative of what investors can expect going forward. Here, however, management announced, back in September of 2018, that the dividend will be cut starting in the first quarter of 2019. This move reflects the new cash flow characteristics of the net-lease-only business. That the stock has performed well for much of the time since the announcement indicates that Mr. Market approves of the new business model, and I agree. It’s hard to get enthusiastic nowadays about the need to rent office square footage (unless We Work is expected to swoop in and rent up a whole building, which seems unlikely for the type of facilities Lexington exited). Based on management’s guidance regarding the future dividend, one should assume, going in that the realized yield is likely to be be around 5.5%-6.0%, not 7.5% but still pretty good.
Sun Communities (SUI)
This is a residential REIT that’s anything but cookie-cutter. It owns communities in which it leases parcels of land upon which tenants can place their manufactured homes or recreation vehicles (depending on which housing type the community in question is dedicated to). Both kinds of communities are developed with roads, utilities, and community amenities such as club houses, swimming pools, fitness centers, tennis courts, and planned activities. A company subsidiary can also help renters acquire homes. That the yield, about 2.5%, is meager by REIT standards tells you Mr. Market sees this more as a growth play, and I agree. We need less expensive forms of housing (Is that really debatable?) and Sun fills the bill. Its manufactured homes rent for an average of $940 per month versus $1,170 at multifamily dwelling while Sun’s homes offer more square footage on average; 1,250 versus 1,100. Meanwhile, the average cost of a manufactured home consumes about two years worth of median income, versus eight years for the average conventionally built home. Community occupancy rates are in the high 90% range and turnover is very low. The inventory of zoned and entitled sites available for expansion is high.
Teradata is exactly what its name suggests; a “big data” or “megadata” company with particular emphasis on analytics. Simply put, it’s about business decision makers to reducing and hopefully eliminating occasions on they say “I don’t know” or “I’m not sure” when asked an important question (Why is it taking so long to replenish inventory in such-and-such? Why isn’t our plant more productive? What kinds of customers are most likely to cancel and how can we proactively address their concerns? Etc.). This can be a complex endeavor as businesses find it necessary to compete with rivals who are getting better and better at finding answers, more answers than many and more answers than many can find using in-house databases on their own equipment and from their own IT personnel. In the past, Teradata saw its role as a consultant, but now, it’s well along an evolution into a subscription-based software-as-a-service firm. The transition has been making for erratic revenue trends given the differing financial models. But ultimately, the increasing prominence of recurring revenue streams should be a plus.
Varian Medical (VAR)
Varian is a medical devices company that focuses on cancer treatment via radiation. I’ve been a fan if this company for many years due to its particular proficiency in tightly targeting tumors while minimizing damage to surrounding tissue. While fits and starts have impacted Varian and its stock from time to time, over the long haul, the company performed and its stock has delivered. Yet even now, well into its corporate evolution, Varian remains debt free and its returns on invested capital remain stratospheric (returns on assets over the past five years and in the trailing 12 months are 7.28% and 10.96%, respectively versus industry medians of -0.6% and -1.07%, and S&P 500 medians of 5.53% and 6.11%). Looking ahead, Varian stands to benefit from a replacement cycle regarding aging U.S. equipment (its new offering has a smaller, more efficient, footprint), expansion in the developed world, where population aging and increasing incidence of cancer are becoming issues), and expansion of the business portfolio (Varian is involved in proton therapy and care management). Also, as of today, besides passing the screen, Varian’s chart pattern is such as to generate a Chaikin Analytics Money Flow Buy signal.