Investors like to think of themselves as rational and unattached. Still, the movement of stock prices shows that this isn’t always true — and the existence of technical signals like oversold or undersold confirms that fact. Sometimes, investors let emotions get the best of them and stampede toward the exit following a bad earnings report, CEO departure, or product recall. However, not every negative story is a reason to sell, and investors who trust the data (while keeping a calm composure) often find the best opportunities. 

When investors become overly pessimistic about a stock, it often becomes ‘oversold’ compared to previous trading periods. In this article, we’ll explain why stocks get labeled as over or undersold and look at a few companies that offer potential based on this signal.

What's the Difference Between Oversold and Overbought Stocks?

What does oversold imply? Consider what happens when a rumor starts about a restaurant or salon. Businesses could suffer because customers think they’ll get a bad deal, even if most of the customer reviews are positive. The same thought process can be applied to oversold or overbought stocks. 

An oversold stock is one that’s seen a significant recent decline that might not coincide with other fundamental or technical signals. On the other hand, an overbought stock has risen rapidly and may be due for a correction if investor exuberance doesn’t match the data.

Methodology for Spotting Oversold Stocks 

You shouldn’t use a single technical signal or data point to influence your investing decisions. The best investment analysis combines technical and fundamental analysis points, analyst reports, and expert opinions.

To find oversold stocks, consider both technical and fundamental analysis.

Technical Analysis

Past price data often provides hints about (but does not guarantee) future performance. In the case of oversold stocks, technical indicators like the Relative Strength Index (RSI), Moving Average Convergence Divergence (MACD), and stochastic oscillator can show when downtrends might be petering out or ready for a complete reversal.

RSI: An RSI over 70 indicates overbought, and under 30 indicates oversold. MACD: If the MACD line crosses above the signal line while the stock is in an oversold state, it could indicate a potential upward reversal. Stochastic Oscillator: A value below 20 signals an oversold condition, implying the stock may be undervalued and due for a rebound.

Fundamental Analysis

Fundamental factors often take longer to materialize than technical signals, but they should not be discounted when looking for oversold stocks. Suppose a stock in a downtrend can match oversold technical signals with earnings growth, a strong balance sheet, or a promising upcoming catalyst. In that case, it only enhances the chances of a reversal.

Earnings Growth: Oversold stocks with positive earnings growth may suggest a temporary market overreaction, signaling a potential buying opportunity. Balance Sheet Strength: Companies with low debt and ample cash reserves are more likely to recover. Catalysts: Product launches, regulatory approvals, or market expansions could drive the stock's value higher and further support the case for a potential rebound.

5 Oversold Stocks to Buy

Here are five stocks with oversold potential based on specific technical and fundamental signals. 

1. Tesla

Few stock sectors have taken a bigger hit recently than electric vehicle (EV) manufacturers. However, despite declining EV sales growth, electric vehicles are here to stay, and no company has a stronger hold on the market than Tesla Inc. (NASDAQ: TSLA). In 2023, Tesla vehicles accounted for nearly 40% of all global EV sales, and the company’s stock stayed buoyant better than EV competitors like Nio Inc. (NYSE: NIO) and Rivian Automotive Inc. (NASDAQ: RIVN) through the doldrums of 2024. TSLA shares have been up more than 40% in the last six months, but the RSI still hasn’t reached overbought status, and company revenue growth is once again accelerating. If these trends continue, Tesla’s recent rally may have more room to run.

2. AstraZeneca

Located in Cambridge, England, AstraZeneca PLC (NASDAQ: AZN) is one of the largest pharmaceutical companies in the world, with a substantial drug pipeline. The company has a market cap north of $242 billion and has traded more than 4.4 million shares per day on average over the last 3 months. Despite an 18% gain over the previous six months, AZN shares still show an RSI under 30, indicating a rally that’s not ready to burn out quite yet. AstraZeneca has posted earnings beats in nine of the last 10 reports, so investors should keep an eye on this stock moving forward.

3. Walgreens 

Walgreens is a name-brand pharmacy store selling everything from prescription medicine to drinks and groceries in all 50 states. Walgreens Boots Alliance Inc. (NASDAQ: WBA) has stores in nine different countries and a solid online footprint through sites like Drugstore.com and Beauty.com. WBA shares have taken a beating in 2024 as the stock is down more than 64% year-to-date, including a more than 40% drop in the last six months. But investors have reason to believe there’s upside ahead: The company has beaten earnings estimates in two of the previous three quarters, and revenue growth returned in 2023 following a 2022 stagnation.

4. Dow

Dow Inc. (NYSE: DOW) is one of the world's largest chemical manufacturers and distributors and may have a stock headed for a rebound. Dow has existed since 1897 and operates in 160 countries, but the stock has faced difficult times in 2024. Shares have been down more than 12% over the last six months, but the price is getting close to the bottom of its five-year range, and the RSI shows a reading under 30. The company reported a miss on its Q2 2024 earnings report, which could be an outlier in the face of five straight previous beats.

5. Albertsons

Albertsons Companies Inc. (NYSE: ACI) is an American chain of food and drug stores operating under brand names like Acme, Safeway, Randalls, Star Market and Kings Food Market. ACI pays a 2.5% dividend and has a low 8.6 P/E ratio, plus an RSI reading just above 30. Albertsons could be undervalued due to its recent earnings miss, as valuation metrics continue to point to a company worthy of its stock price and market cap.

The Smart Way to Approach Oversold Stocks

Technical analysis can help identify profitable stocks based on past price patterns. If an oversold stock tracks one of those patterns, it insinuates value when other price data points toward a losing position. Oversold stocks might be beaten-down shares primed for a revival, but this label isn’t a foolproof method for finding profitable companies. Never use a single indicator as your only research tool, and always consider your timeline and investment goals when performing stock research.

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Source MarketBeat