Trade Alert: An Oversold Industrial

Insiders have been buying it ahead of earnings this week.

Another RSI Buy

In a post last month, we wrote about the power of RSI (Relative Strength Index) as a technical indicator (Relative Strength Index) in relation to Stitch Fix (SFIX 0.00%↑) . 

And in a post earlier this month, we wrote about An Oversold Gold Miner.

Since we wrote that second post, shares of that gold miner are up 13%, and our options trade on it is up 50%. And that's before that company reports earnings next month. The industrial stock we're writing about today releases earnings later this week. Let's quickly recap what RSI is, and then look at why we're betting on this industrial now. 

An Oversold Industrial 

Recall that RSI is a number from 0 to 100 indicating how overbought or oversold a security is. Values over 70 are usually considered overbought, and values below 30 are usually considered oversold.

One screen we’ve been looking at recently includes both RSI and the Piotroski F-Score, which is a measure of financial strength on a scale from 0-9, with 9 being best. We run a bearish version of that where we look for stocks with an RSI over 80 and a Piotroski F-Score of 2 or lower, and we run a bullish one where I look for an RSI under 20 and an F-Score of 8 or better.

An industrial stock comes up on this screen now, one with an F-Score of 8 and an RSI below 20.

Digging Deeper

As with all mechanical screens, it’s best to do some further investigation, to eliminate false positives. For example, one of the stocks the bearish version of this screen picked up recently was Reata Pharmaceuticals (RETA 0.00%↑) where the RSI looked high because the company had just been acquired by Biogen (BIIB 0.00%↑).

Digging deeper into our oversold industrial, we find that its fundamentals are strong, except for growth stability. 

In this case, the relatively weak growth stability is an artifact of the COVID lockdowns: this is one of those companies that saw demand pulled forward during the pandemic, and a subsequent softening after. 

A Big Collapse After Mixed Earnings Last Quarter 

In July, the company beat on earnings but missed on revenue, and, more importantly, offered significantly lower forward guidance driven by market weakness. In response, the shares plummeted about 25%. 

Here's Where It Gets Interesting 

After that share collapse, no insiders sold; instead, five of them--all directors, including the chairman of the board--bought more shares in the open market. And two of those directors bought even more shares two weeks ago.

Think about that for a moment. The company's 3rd quarter ended on September 30th. Presumably, those directors had some inkling of how the company did in that quarter, and they decided to buy more shares. 

And now you can buy those shares for ~24% less than what those directors paid. 

Except we're not going to do that. We're going to spend even less, by buying options on the stock. As oversold as it is (remember, an RSI below 20), when the company reports earnings this week, if those earnings are less terrible than the market has already priced in, the stock could bounce. And if it does, our options will bounce even higher. 

Details below.

Our Bullish Bet On An Oversold Industrial