When Stocks Reach Oversold Conditions, Pounce Quickly
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When golden hour comes for stocks, don’t stop and stare… Get in there.
That’s been a mantra of mine for years.
I started saying it back in 2017, when I began building a long-term portfolio of champion-caliber stocks that had fallen on hard times.
While there’s no crystal-ball analysis that works every time, we can always depend on stocks going through a rough patch every so often.
Those moments can feel gut-wrenching to sit through. But if your analysis signals a lot of upside potential, when the crowd is selling hand over fist… don’t wait… get in there!
The recent volatility got me thinking this way again. So today we’re going to do two things.
First, we’ll circle back on one of my favorite rare oversold stock opportunities from three months ago. We’ll unpack why the stock is surging.
Second, we’ll uncover an all-star stock that’s had a mega-pullback. And one evidence-rich study points to a violent rally ahead.
Starbucks is Finally Finding Its Way
Rewinding back to May of this year, we put out arguably the wildest non-consensus forecast ever for flailing Starbucks (SBUX). (Disclosure, I’ve owned SBUX for years and still do)
Just three short months ago, the stock had collapsed 32% year-to-date after a dismal earnings report.
But we saw something few other investors could – a killer oversold signal that stacked the deck in an investor’s favor.
Not only did we highlight the continual share buybacks by the company and the ultra-historically-low forward P/E ratio of 19 as reason to take a stab…
But we also noticed a booming dividend yield reaching 3% that’s rarely seen for SBUX shares. Over the last 20 years, when Starbucks dividend climbed to 2.75% or higher (using weekly data), it posted double-digit gains months later:
We didn’t know that the company would replace then-CEO Laxman Narasimhan with former Chipotle Mexican Grill (CMG) CEO Brian Niccol. But on the other side of that news, fortunes quickly changed.
I’ve been an owner of CMG shares for many years, so I understand why this pickup was so special for SBUX.
If you recall, Niccol was hired back in February 2018 to run Chipotle after the company faced an E. coli scare. Since he took the reins, shares have gained 600%-plus, proving that not all superheroes wear capes. At least one is wrapped in burrito foil.
This notable hire caused SBUX shares to surge over 20% on Tuesday:
On the flip side, Chipotle shares dragged 9%.
All in all, the oversold signal was a good bet. Since that post, SBUX has gained a whopping 25% in three months.
But now that I’m done with my victory lap, let’s move on to a more pressing oversold signal for another all-star company…
Super Micro Computer (SMCI) is a Screaming Buy
The AI heatwave seemed to never cool.
For more than a year, investors have been enamored by the AI goldrush.
Pick the winning ticket, and you can massively outperform.
A case in point is the epic rise of superstar semiconductor firm Super Micro Computer (SMCI). If you’re unfamiliar with this rack-scale, cloud and storage juggernaut, check out a piece I wrote on them back in January.
Back then the company released a mind-blowing beat and raise, kicking off a mega-rally for the ages.
But as with Starbucks and all companies, eventually a dreaded pullback rears its ugly head. Pull up any long-term chart of any stock and that up-and-to-the-right chart is full of pops and drops along the way to eventual glory.
Once the darling of Wall Street, SMCI has fallen on hard times, reaching a peak-to-trough decline of over 50%.
What was once a $1,200 stock has recently fallen below $500 at its local trough.
Below you’ll see a one-year chart of SMCI, with the AI craze kickstarting a bull run in January. Then beginning in April, the shares began to decline.
The latest earnings report earlier this month saw the shares plunge 20% in one day. I’ve also outlined a prior 20%-plus daily drop back in April:
Now, the first question you’re probably asking is… what did they report?!
Afterall, losing one-fifth of its value is stunning.
For the fourth quarter, the company met revenue expectations with $5.31 billion and fell short with EPS coming in at $6.25 – well below analysts’ expectations of $8.12.
Now their first-quarter EPS guidance came in at $7.48 per share, also below estimates of $7.58.
On the positive side for the first quarter, they are expecting $6.5 billion in revenues, well above Street expectations of $5.52 billion.
In their full-year revenue guide, they shattered Wall Street sales estimates of $23.4 billion and are forecasting $28 billion at the mid-point.
SMCI also announced a 10-for-1 stock split. History proves that stock splits are quite bullish for all-star equities.
If that doesn’t encourage you, consider the valuation. The current forward P/E sits at 15.24 – take it out another year and the P/E drops to 10!
Folks, this near-term earnings setback is a gift. Business is still booming and expanding. I wouldn’t be surprised if margins increase in the coming quarters once management gets their ducks in a row.
That said, the 20% drop that occurred on Aug. 7 is what I want you to focus on today.
We know stocks rip and dip along their long-term journey. But some dips are worth putting a little extra focus on.
A daily collapse of 20% or more for SMCI has only occurred six times back to 2007. This is rare…and actually a powerful oversold signal.
Here’s why you need to consider picking up this left-for-dead AI name.
Whenever Super Micro Computer falls 20% or more in a day, the forward returns are spectacular:
- Three-month average gains of 24.1%
- Six-month average gains of 79.1%
- Take it out to 12 and 24 months and you’re staring at 67.1% and 81% rockets, respectively
Those are some incredible stats, if you ask me.
And I’m not suggesting SMCI will mimic these awe-inspiring results. What I am suggesting, however, is recognizing opportunities that rarely come along.
You don’t need a crystal ball to make money in stocks.
You just need rock-solid historical evidence before making a wager.
That’s a process that uncovered SMCI for TradeSmith’s Quantum Edge Pro service late last year… before the epic rise.
My bet is there will be other golden hour opportunities that’ll arise heading into the end of the year. And remember…
Golden hour rarely lasts long.
Don’t stop and stare… get in there.
Regards,
Lucas Downey
Contributing Editor, TradeSmith Daily