The global capital markets have delivered stellar returns over the past 12 months despite the coronavirus pandemic. The bull markets have been driven by a low-interest-rate environment and generous government stimulus packages that have lined investor pockets. A low-interest-rate environment is excellent for the economy and businesses as it reduces the cost of doing business and induces growth and spending.
The TSX index has performed well so far this year and has gone up 14%. However, some stocks and sectors have not rebounded from the pandemic, and others have ended up in the oversold territory. Nevertheless, these stocks might present opportunities for investors to generate outsized returns when the pandemic is entirely behind us.
An analytical standard and reliable indicator to identify oversold stocks is the Relative Strength Index (RSI). The RSI reflects the change in security momentum; it is calculated as the ratio of higher closing prices to lower closing prices over a timeframe, typically 14 days. The general rule is that an RSI below 30 reflects that a stock is oversold and should revert by moving upwards over time. It is commonly used in conjunction with a moving average, a rolling average of a stock’s closing prices over a specified period and indicates the stock trend over that period.
Oversold / Undervalued Stocks on the TSX
Here are some stocks that we believe are in oversold territory and undervalued at current prices –
1. Bombardier Recreational Products (TSX: DOO)
BRP is a spun-off offspring of aviation major Bombardier. It is engaged in producing recreational vehicles such as snowmobiles, personal watercraft, all-terrain vehicles, and two-wheelers. The stock currently has an RSI of 29.
The company recently turned a profit in the first quarter of the year after loss-making quarters. The company credits the profit to pent-up demand for outdoor recreational activities as the economy bounces back from the pandemic. In addition, the company reported higher wholesale revenues for year-round and seasonal products, thus reflecting a stable retail environment.
In Q1, the company reported a profit of C$ 244 million against revenues of C$1.8 billion and declared a dividend of 13 cents a share. After positively surprising investors and analysts with better than expected results, the company has raised its FY22 guidance and project profits in the region of C$700-C$750 for the year.
The stock has recently undergone a sizeable correction; it is down 24% from its all-time-high of April. The stock has broken down from an ascending channel but is positioned on the 200-day moving average, where support is expected. This correction has taken the stock into the oversold territory at RSI 28. It appears that the stock will resume its uptrend if the 200-day moving average is not breached.
2. Hardwoods Distribution (TSX: HDI)
Hardwoods Distribution is one of the largest wholesale distributors of architectural building products in North America. As a result, the company has greatly benefitted from the COVID-induced shift to work-from-home and low-interest rates that has spurred housing demand in the US and Canada.
In 2020, the company reported its most successful year of operation despite the pandemic. In Q1 2021, the company reported C$291 million and profits of C$12.9 million, up 20.4% and 85% YoY, respectively.
Another primary reason this stock is particularly attractive is that government stimulus packages and cheap debt have put us on a path of inflation. Due to the agile and relatively asset-light nature of the distribution business, Hardwoods can very efficiently pass on rising costs to customers.
Hardwoods are currently up 24% YTD, but the stock has undergone a 14% correction over the last month, is available at a P/E of just 16, and offers an excellent dividend yield of 1.30%. After its recent correction, the stock is oversold with an RSI of just 27. The daily chart of Hardwoods shows that the stock has fallen out of an ascending channel. Simultaneously the 20-day moving average has breached the 50 days moving average on the downside. The stock looks bearish and will likely find support in the C$28-C$30 range in the short term. Given its strong fundamentals, it should resume its uptrend from there onwards.
VersaBank is a digital banking company. It was the world’s full digitized financial services provider. The company aims to capitalize on a low operating cost model coming from its fully digital presence. VersaBank’s loan portfolio consists mainly of commercial and corporate lending, which has seen significant demand due to the effects of COVID.
VersaBank recently reported a very strong second quarter of 2021. Q2 was a record $16 million, up 10% YoY and 6% QoQ, and net income was C$5.7 million. The bank also reported a record-low cost of funds of just 1.26%.
We believe VersaBank will outperform the banking sector over the next few quarters because a low-interest-rate environment harms the banking sector due to narrower net-interest margins. In addition, VersaBank has far lower operating costs than its traditional banking peers as they don’t have to bear costs associated with operating physical branches; hence their margins should outperform those of peers.
VersaBank has undergone a 14% correction over the last month. VersaBank has been moving in a down-sloping sideways channel for the previous four months and appears to have reached a selling climax with an RSI of only 15; it is likely to find support in the range of C$12, where it coincides with its 200 days moving average. Therefore, we believe C$12 is a reasonable price to start buying the stock.
Why Choose These Oversold TSX Stocks?
We believe that these stocks are great fundamentally strong businesses that are available at reasonable prices. As the economy recovers from COVID over the year, these companies should see their businesses flourish and create value for their investors. As vaccinations rise and tourism goes back to normal, Bombardier Recreational Products should see increased demand for its products from outdoor entertainment service providers as there is a lot of pent-up travel demand after a year of work-from-home and lockdowns. As COVID induced a structural shift from office work to work-from-home combined with cheap debt, the housing and real estate market is going from strength to strength. A strong real estate market leads to increased construction activity, which should play into Hardwood’s hands. Along with a structural shift to work-from-home, COVID has also accelerated digital adoption, which served VersaBank very well and, when combined with its cheap and efficient business model, should help it outperform its peers in this low rate environment.
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Oversold Tsx Stocks
On Monday, the Toronto stock exchange posted a substantial three-digit gain as buyers bought stocks that had suffered a plunge, a sell-off that has left the TSX barely in positive territory for the year. Cap provides a snapshot of day-to-day trading on the Toronto Stock Exchange, while the S & P / TSX composite falls to its lowest level in more than a year and a half. Toronto Stock Market posted the strongest three-digit gains on Tuesday, as buyers bought shares in stocks that have suffered a plunge – hardly a plunge for this year, according to data from BMO Capital Markets. Sources: 10, 12
According to BMO Capital Markets, 131 shares were overbought on Tuesday, exceeding the 70% mark of the RSI indicator. Nvidia (NVDA – NASDAQ: 100) moved below its 50-day average on Monday, setting off a temporary downward trend, but the stock has since been overbought after continuous buying. Sources: 7, 8
The best performing stock was HNL (TSX: TSLA – NASDAQ: L) on Tuesday after a profit drop, according to BMO Capital Markets. We compared the top and bottom lines of the S & P 500 for the first three months of 2016. Sources: 6, 10
The 14-day RSI is a pulse indicator that compares a company’s bullish or bearish price dynamics with its share price. For TSLA, the review of the 14-day and 12-month uptrend indicators for the TSX – Toronto Stock Exchange shows that it is pretty reliable and provides a buy or sell signal over a more extended period. When an oversold stock is traded on the TSX Toronto Stock Exchange, the oversell / uptrend (or “uptrend”) in RPI has returned. For example, in the case of HNL, it has been on the upward trend since the beginning of the year, as impulse indicators that compare the price and dynamics for companies from bullish to bearish show. Sources: 8
This allows investors to search for a stock that has recently shown a positive or negative trend in its RSI (or stochastic oscillator). The Rsi of a stock can fall from overbought territory to oversold territory within a few days, so it should only be used as a short-term trading indicator. The RPI and Stocks and Shares Indicator allows you to determine whether a stock is oversold or not. One of the most valuable indicators for determining oversold stocks is the Stochastic Indicator S & P / TSX Stoxx 500, a technical oscillator that uses price and volume to identify the overbought and oversold zones of stocks. Sources: 1, 4, 9, 11
You can use the CCI Screener (Commodity Channel Index) to detect a new trend when overbought or oversold stock. Sources: 5
The RSI Stock Screener lets you determine whether an oversold or overbought stock or shares with rising or falling RSI value have been sold. It allows you to filter out the most traded stocks and the volume of stocks traded in the most Canadian. Sources: 2, 5
RSI values above 30 reflect an oversold condition (+ 1 hurts) and a value below 30 (-2 hurts). Using stochastic methods to find overbought or oversold stocks is an excellent way to see when you should get in or out of stock. These eleven Canadian consumer staples have come under investor scrutiny in recent months with a positive RSI of -1.5 or higher. Sources: 5, 8, 10
Before buying into the Straits Times Index (STI), let me say something about the Singapore stock market. The first value on this list is a leading renewable energy source with a positive RSI of -1.5 or higher. Stock exchanges have provided companies with access to equity for over 160 years. It is the capital where ideas and innovation meet, and it is the capital where the best and brightest minds in the world work. Sources: 0, 2, 3, 8
The S & P / TSX Composite Index is the Canadian benchmark index representing approximately 250 companies that have been included in the index. The S & P / TSX is a significant stock index that tracks the performance of large companies. Sources: 0, 10
Most active share price changes usually indicate that buyers are coming and short-sellers cover their trades, pushing up the share price. There are several ways to find oversold stocks, depending on whether you are interested in the S & P / TSX Composite Index or another index. Shares 25 cents shows the best day’s winners and losers of the day and the average daily volume for each stock over the past 30 days. Sources: 1, 2
The average daily volume of the last 30 days for the S & P / TSX Composite Index is based on a weighted average daily volume for each share during that period. Based on the average daily volume over this period for all stocks in the index, with the highest and lowest volumes per share on each day of each month. Sources: 9
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