Six months of choppy trading has pulled the S&P 500 down nearly 20% YTD while the Nasdaq is down more than 28% for the same period. Although buying in this environment would have you trying to catch a falling knife, it’s actually a good time to look at some of the most oversold stocks for potential recovery candidates.
As you can see in the image below (courtesy of LPL Research), we’re actually near a fairly critical juncture in the current bear. If we look at every bear market going back to 1956 (15 in total), the S&P 500 has averaged a decline of 30.3%.
But what’s notable about the current market is that we’re approaching something of a line in the sand. LPL found that if a bear market exceeded a 22% decline, the S&P would go on to post (on average) a decline of 37.2%. On the other hand, bear markets experiencing a decline of less than 22% ultimately averaged a total decline of only 19.9%.
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That puts the current market at a tipping point: more short-term pain is likely to portend further losses (and a longer recovery, average of 27 months) while a fresh bottom could mark the end of the bear market (and a shorter recovery, average of seven months). Because we’re trend followers at Cabot, we’ll plan for the former (by holding off on new buys) but hope for the latter (by investigating some of the most oversold stocks).
3 Most Oversold Stocks in the S&P 500
To screen for the most oversold stocks we looked at S&P 500 companies that were down at least 50% from their 52-week highs and subsequently sorted those companies by their Relative Strength Index (RSI) values.
The RSI is useful when looking at the most oversold stocks as it can help you quickly identify whether a stock is technically undervalued. Stocks with an RSI reading below 30 are considered oversold, while those with readings above 70 are considered overvalued.
An important caveat with momentum indicators: Stocks that have established a clear trend can remain overbought or oversold for as long as that trend continues, meaning a stock in a strong downtrend will signal that it’s oversold even as it continues trading lower.
S&P 500’s Most Oversold Stocks #3: Expedia Inc. (EXPE)
This well-known travel search aggregator and booking service is 57.5% below 52-week highs. The stock is currently trading below its pre-pandemic levels, but above the pandemic lows with an RSI of 35.08 meaning that, despite being one of the three most oversold stocks in the S&P, the shares are still not technically undervalued.
Unfortunately for investors, even with the massive decline in share price, Expedia hasn’t gotten cheap. It is currently trading at 60x trailing earnings while shares look for a bottom. The company is navigating crosscurrents in today’s environment as recession fears and a potential decline in consumer spending contend with pent-up travel demand from travelers who may have spent the last few years earmarking savings for trips they were unable to take and who are not willing to forfeit another year of travel, recession or no.
As for the chart, it’s looking like most others out there: some potential from bullish momentum divergence but no confirmed bottom yet.
S&P 500’s Most Oversold Stocks #2: Royal Caribbean Cruises (RCL)
Unsurprisingly, cruise operator Royal Caribbean is also one of the most oversold stocks in the S&P. It’s trading 65.7% below its 52-week high and is down 69.2% in the last five years. The RSI is signaling nearly oversold conditions with a reading of 34.05, but that’s the only positive data point.
Royal Caribbean was effectively shuttered during the pandemic and took on massive amounts of debt to stay afloat. The company ended 2019 with $8.4 billion of long-term debt and saw that number explode to $19.94 billion in the most recent quarter.
Shares dropped 10% at the end of June on an analyst note from Morgan Stanley speculating that rival Carnival shares could drop to zero in the event of a recession further dampening consumer spending.
S&P 500’s Most Oversold Stocks #1: Bath & Body Works (BBWI)
The home-centric retailer is 67% below its 52-week high and down 26% in the last five years as it’s caught in the crosscurrents between the boom in home goods buying during the pandemic and possible declines in retail spending as consumers feel the pinch of inflation.
Analysts aren’t anticipating growth this year, coming on the heels of five years of double-digit contraction, but they are bullish looking into the future with the stock carrying a “Moderate Buy” rating from analysts. The stock is also close to oversold, with an RSI of 33.89, and trades at only 6x trailing earnings with a 2.9% dividend.
The shares nosedived last month on the heels of a downgrade from JPMorgan, which is estimating an 80% chance of recession in the next three years. If the Fed can engineer a soft landing that simultaneously dampens inflation while avoiding a recession, this stock is the most attractive of our three most oversold stocks.
Given the current (and rising) risks of a recession (could be confirmed at the end of this month), all three of these are best avoided in the short term. Once a bottom is in and consumers begin feeling more confident, BBWI is hands-down the most attractive of the most oversold stocks in the S&P 500.
How do you feel about the current market? Have you begun screening for oversold bargains or are you staying on the sidelines?
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