Interested in finding potentially undervalued stocks? If so, you may consider yourself among the "value investors" -- those who search for stocks they believe are trading below their fair value. The assumption is that eventually, the stock price will rise to match its fair value, generating a handsome profit.
Relative Strength Index (RSI)
One way to identify undervalued companies is to follow technical indicators, which use price and volume data to determine when trading trends occur.
One particularly interesting technical indicator is the relative strength index (RSI).
RSI is a momentum indicator that measures the speed and change of stock price movements. It ranges from 0 to 100, with readings above 70 indicating overbought behavior and readings below 40 indicating oversold behavior. Truly oversold stocks can be expected to rise to a fairer value in the near future, and vice versa for overbought stocks.
Business section: Investing ideas
To demonstrate these ideas, we ran a screen on large-cap stocks for those that are technically oversold, with RSI(14) below 40. RSI(14) is one common form of the index, which is measured with data from the last 14 days.
To narrow down our list of oversold stocks, we took a look at the buying trends institutional buyers, such as hedge funds.
Because institutional investors handle such large amounts of money, it is easy enough to assume that the big money managers know what they are doing -- or at the very least know more than the average investor. This is why these investors are also sometimes referred to as the "smart money."
Do you think these hedge funds are right to buy these oversold companies? Will they soon rise to a fairer value? (Click here to access free, interactive tools to analyze these ideas.)
2. CARBO Ceramics
3. Gentex: Designs, develops, manufactures, and markets electro-optical products to automotive, commercial building, and aircraft industries in the United States and internationally. RSI(14) at 28.45. Net institutional purchases in the current quarter at 4.2M shares, which represents about 3.03% of the company's float of 138.58M shares.
5. Polypore International
6. Rex Energy: Operates as an independent oil and gas company in the Appalachian, Illinois, and Denver-Julesburg Basins. RSI(14) at 22.52. Net institutional purchases in the current quarter at 4.2M shares, which represents about 11.82% of the company's float of 35.54M shares.
7. Twin Disc
Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.
Kapitall's Rebecca Lipman does not own any of the shares mentioned above. Institutional data sourced from Fidelity.
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