Oversold and Unloved Can Spell Trading Profits
01/08/13 - 08:49 AM EST
NEW YORK (
) -- Finding bargains, the diamonds in the rough, is rarely an easy task. The old mantra of Wall Street is "buy low and sell high" but many investors find their results appear closer to "buy high and sell low."
I don't recall when I heard it first, but the quote "buy high and sell even higher" is what most investors should strive for. Value buying is more difficult because as any value buyer who has invested for a long time knows, it's a fine line between buying value and becoming a bag holder.
I am here to help you separate the values from the bags. My favorite filtering tool is DeMark indicators. I don't make trading decisions from DeMark indicators directly, but my own modifications of several market timing tools heavily influence me.
My last oversold article was
Five Oversold Stocks: One Is a Strong Buy, One Is a Lotto Ticket
. Let's take a look and examine the results. I will use the closing prices on the date of publication and Monday to calculate the return (with the exception of RadioShack).
RadioShack's cost basis is calculated differently because I provided entry instructions to wait on buying until the criteria were met.
Overall, the market based on the
Spider S&P 500
is up 2.7%.
Examine the stocks I am reviewing now and see if any make sense for your portfolio and investment objectives.
NAV Revenue Quarterly
Background: Navistar, through its subsidiaries, manufactures and sells commercial and military trucks, buses, diesel engines, and recreational vehicles, as well as provides service parts for trucks and trailers worldwide. The company operates in four segments, truck, engine, parts and financial services.
52 Week Range: $18.17 to $48.18
Navistar is oversold on the weekly chart, but in the last month, the stock is up 7.8%. As a result, I want to see a pullback under $23 before entering long. $22.75 is my target entry price to get long.
Analysts are not overly bullish. Only five out of 18 rate the company a buy, while the majority rate it a hold and three recommend selling. It's understandable why analysts are not calling for investors to back up the truck; the shares are down 42% in the last year (ouch).
They have to be down to reach my criteria of oversold status though, and others' pain may be your portfolio's gain. The average analyst target price for Navistar International is $26.92. My 12 month price target is $28.50 at this time.
The short interest is anything, but short. The number of shares shorted is markedly elevated and should be treated as warning that shorts anticipate upcoming price weakness. The current float short is 23.3%.
EXC Revenue Quarterly
Background: Exelon subsidiaries are engaged principally in the production, purchase, transmission, distribution and sale of electricity to residential, commercial, industrial and wholesale customers and the distribution and sale of natural gas to residential, commercial and industrial customers.
52 Week Range: $28.40 to $41.75
Price To Book: 1.2
The good news is the company currently pays $2.10 per share in dividends for a yield of 6.9%. The bad news is that fears of a dividend cut are contributing to the sell-off. One possible solution is to use options as the means to gain exposure.
In this list, Exelon is by far the highest risk short term, but over the longer run, offers the greatest potential. In a perfect world, I would enter long AFTER a cut in dividend. Low natural gas prices are pushing margins lower, but also create an incentive to move away from gas and diesel as a transportation fuel, into natural gas.
We don't know if the dividend will get cut, and it's too much risk unless you're able to view Exelon as a long term hold.
Shares traded slightly lower in the last month of trading. Shares are about breaking even at 1% less than a month ago.
Analyst opinion is mixed. Exelon has four buy recommendations out of 22 analysts covering the company, and 18 holds. The average analyst target price for Exelon is $33.88.
Direxion Daily Financial Bear 3X
Background: Unlike most of the stocks I cover, this one is a fund that allows traders to short the financial market without taking an unlimited amount of risk. This is a leveraged product, but don't let the 3X fool you. My experience is that leveraged products rarely mimic the underlying at a rate equal to the stated amount over a long period of time. The FAZ is best suited as a day trading product.
52 Week Range: $13.37 to $34.69
As a leveraged exchange traded fund product, technical analysis is the primary method I use to determine the relative price and expected upcoming price direction. FAZ is oversold on the daily and weekly charts based on my technical analyst.
I have a price target of $15.
ACI Revenue Quarterly
Background: Arch Coal engages in the production and sale of steam and metallurgical coal from surface and underground mines located in the U.S.
52 Week Range: $5.16 to $15.99
Price To Book: 0.5
Arch Coal is experiencing a one-two punch from the current administration's lack of enthusiasm for the coal industry, along with record low natural gas prices. Low natural gas prices mean coal is experiencing displacement from power producers for the fuel choice.
Arch Coal is off its recent lows after building a solid price base of support. Since natural gas producers are slowing or shutting down rigs as a result of low prices, it stands to reason that the coal industry is currently in as bad of shape as can be expected.
After a cut in the dividend pushed share prices lower, the risk of further dividend cuts impacting the share price is largely priced in. Most or all of the expected negative news is already priced in.
Even with lower natural gas prices, shares in Arch Coal are starting to trade higher. Shares are up 2% from a month ago.
The short interest is anything but short. The number of shares shorted is markedly elevated and should be treated as warning that shorts anticipate upcoming price weakness. The current float short is 20.7%.
The only way I would consider putting a position on with Arch Coal is either selling covered calls, or selling cash secured put options. By selling options, investors lower their risk and use option premium time decay to their advantage.
An example is selling the April $7 put option for 75 cents or more. If I sell an option and the stock is put to me, my cost basis will be only $6.25. If the stock doesn't trade below $7, the gain is more than 10% in three months.
ACI Payout Ratio TTM
At the time of publication the author held no positions in any of the stocks mentioned.
This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.