By Philip van Doorn
During a year in which more than half of the stocks in the S&P 500 Index have declined 10% or more, you have probably seen the term “oversold” being bandied about.
But what does oversold really mean?
It means you think a stock has dropped too much, based on some quality you expect to fuel outperformance from here.
If you are looking to buy stocks in this jittery market, you had better do some deep research to form convictions, rather than jumping on the bandwagon.
Read: The beginning of the end of the stock market’s correction could be near
Below is a screen of the S&P 500 /zigman2/quotes/210599714/realtime SPX +1.30% to identify stocks that may be oversold. But first, here are examples of some stocks that may fit the bill.
An example of a stock that may be oversold
Shares of Signature Bank /zigman2/quotes/204403715/composite SBNY -22.87% of New York have fallen 38% in 2022. This is one of the most rapidly growing regional banks. For example, during 2021, the bank grew its commercial and industrial loan portfolio by 79% to $32.9 billion, with loan quality remaining strong as it continued to poach lending teams from rivals.
The stock’s decline this year reflects investors’ change of opinion about virtual currencies. Signature Bank has pioneered banking services for virtual currency exchanges and related institutional clients. The bank also launched Signet, a blockchain-based digital-payments service, in 2020.
The “problem” for the stock seems to be that many people who held it did so only because of the crypto angle, and not because they were excited to see a bank growing its traditional business so rapidly.
Despite investors’ turn against the stock, Signature Bank is expected to continue its rapid growth. All 17 analysts covering the stock polled by FactSet rate the shares a buy or the equivalent, and based on consensus estimates, the bank is expected to increase its earnings per share 48% this year and 22% in 2023. But the stock’s forward price-to-earnings ratio has declined to 8.3 from 18.6 at the end of 2021. In comparison, weighted aggregate forward P/E ratios are 17.2 for the S&P 500 and 12 for the S&P 500 financial sector.
In a report on May 13, Jefferies analyst Casey Haire suggested SBNY was oversold because its 2023 earnings would come in at $20 a share even if its $29 billion virtual currency deposit franchise were stripped out. Based on the closing price of $201.20, that would make for a P/E of 10.1. In comparison, the slower-growing S&P 500 financial sector trades for 11 times the weighted aggregate consensus EPS estimate for 2023.
Two more examples of re-ratings in 2022
Netflix Inc. /zigman2/quotes/202353025/composite NFLX +0.22% has been the worst performer among the S&P 500 so far this year, dropping 69% through May 13, followed by PayPal Holdings Inc. /zigman2/quotes/208054269/composite PYPL +4.79% , with a 58% decline. What does a payment processor have in common with a video streaming pioneer? Both companies have focused on growth of user accounts in their financial reporting.
But Netflix’s forward P/E ratio has dropped to 16.5 from 45.6 at the end of 2021. So it has gone from a lofty valuation for a rapidly growing tech-oriented company to a valuation below that of the S&P 500. Charles Lemonides of ValueWorks recently suggested the price drop set up a buying opportunity for long-term investors .
PayPal’s forward P/E has declined to 18.5 from 36 at the end of 2021. But the company is expected to increase sales and EPS by double digits in 2023, and it is favored by analysts, as you can see on the screen below.