From their February 19 highs, the Nasdaq is lower by 12.7%, the S&P 500 is lower by 9.1% and the Dow is lower by 7% (February 19 was a recent high but not an all-time high for the Dow).
That means the Nasdaq is fully in correction territory while the other headline indexes are knocking on the door.
I do expect the S&P to enter a correction this year (and have said as much on the Street Check podcast), but corrections in bull markets are common (50/50 chance in any given year) and don’t necessarily mean we’re entering a bear market.
That’s not to say that a bear market is impossible, but we are still in the midst of a relatively young (29 months) bull market.
So, given the rapid correction and operating with the assumption that this is a bump in the road and not a complete change of direction, let’s see if we can’t identify some stocks that are technically oversold but still promising.
[text_ad]
For this exercise, we’ll use the screener on Finviz due to its wide range of criteria and ease of use.
Screening for Stocks to Buy on the Dip
RSI Below 20
Our first criteria will be stocks that are showing technical oversold levels on the RSI, specifically, levels below 20.
One note: Should this correction turn into a full-blown bear market, we’ll see plenty of stocks trade below 20 on the RSI, as indicators like this will show persistently oversold (and overbought) conditions when the stocks are trending.
At the time of writing, there are 109 stocks trading with a 14-day RSI below 20, far too many to investigate individually.
Small Cap (or Larger)
To weed out stocks that might present liquidity issues, let’s filter out micro-cap stocks by adding a criteria that the stocks must be small cap (+$300 million market cap) or larger.
This drops our pool of potential stocks to 60 and helps ensure that the stocks we’re looking at aren’t oversold because of mechanical issues (one or several motivated sellers with few buyers to provide liquidity).
There are other ways you can fine-tune this, such as specifying a minimum amount of volume, but market cap is a good place to start.
Buy-Rated by Analysts
Next, we’ll want to target stocks of companies that enjoy solid perception in the market. Oversold stocks will have experienced a lot of selling lately, so it’s tough to take price action as a perception cue, but we can use analyst ratings as a proxy for sentiment.
If we include only stocks that are rated a buy or higher by analysts, our pool is further narrowed down to 46 names, still too many to investigate thoroughly.
Sales and Earnings Growth
Our last two criteria for the screener will be sales growth of greater than 20% for the last five years and expected earnings growth of more than 20% for the next five years.
This helps ensure that we’re only looking at companies that have been growing and are expected to continue to grow going forward (although earnings growth can come from either improving profitability or growing sales).
Those two factors drop our list of 46 stocks down to only five, a very manageable number to investigate further. Those names are:
Nerdwallet (NRDS)
PubMatic (PUBM)
SEMrush Holdings (SEMR)
Alkami Technologies (ALKT)
Tandem Diabetes Care (TNDM)
Two names immediately jump out to me due to industry risks, namely Nerdwallet and SEMrush.
Nerdwallet is a relatively well-known publisher of financial information (we’ve periodically referenced their content in the pages of the Daily) and SEMrush is a search engine optimization firm that provides tools for website owners and content producers.
Both are at risk of AI-driven disruption in the online content space, which is enough for me to exclude them as candidates entirely.
That said, they do meet our criteria, so you can draw your own conclusions.
As for me, I’m more interested in the remaining three stocks.
Tandem (TNDM) is a provider of insulin pumps and diabetes care that recently sold off on earnings and suffered a downgrade from Bernstein. They’ve lowered their price target to 25 (from 35), which gives the company 39% upside from the current price.
PubMatic (PUBM) is a digital advertising firm whose platform provides “real time programmatic advertising transactions for digital content creators, advertisers, agencies, agency trading desks, and demand side platforms worldwide.” The company’s latest earnings beat expectations on soft revenue, and shares were downgraded by Scotiabank, who lowered their price target to 15 from 17 (56% upside from the current price).
Alkami (ALKT) is a digital banking services provider that’s also taken a hit recently, partially on news that the company will spend $400 million to acquire MANTL (an account opening technology company) and will issue $300 million in convertible debt (at a conversion price of $32.82 per share).
Baird recently lowered their price target to 35 (from 41), which offers 46% upside from the current share price.
Tandem has the lowest upside potential (by price target) but has been bottoming for the last week and may be the lower-risk play should the correction turn into a bear market. But if we get a strong bounce back, the other two names both look much more promising in a continuing bull market.
Sign up now!
Sign up now!
Sign up now!
Sign up now!
