Based on their daily charts, approximately 40% of the U.S. mid-cap universe is flashing a relative strength indicator (RSI) reading under 30. The RSI is a commonly used technical analysis threshold that suggests oversold conditions have set in.
With the S&P 400 mid-cap index down 8% year-to-date, this means that many stocks have suffered double digit percentages losses despite the end of January trading still a few days away.
In some cases, the selloffs seem justified such as with highflying, high P/E technology companies in a rising yield environment. In other cases, it has been a classic case of a sinking tide dragging all boats down.
This has made certain mid-caps with good long-term growth potential downright bargains. Here are three sub-30 RSI stocks that appear to have much more upside than downside.
Is Cleveland-Cliffs Stock Undervalued?
Cleveland-Cliffs (NYSE: CLF) has tumbled down the mountain to the tune of 22% so far this year. The iron ore miner fittingly has a matching 22 RSI reading which makes it one of the most oversold mid-caps around.
Yet while its share price has somewhat fallen off a cliff, Cleveland-Cliff’s growth trajectory has not. In 2021, its three U.S. mines fed a fast-recovering appetite for iron ore pellets from steelmakers and for its own steel products from automakers, construction companies, and various industrials. Analysts are forecasting earnings per share (EPS) to come in just shy of $6.00 after the company posted a small loss in 2020.
Growth off this elevated base is expected to be far more modest in 2022, but even single-digit profit growth would be no small feat and keep Cleveland-Cliffs firmly in recovery mode. With a pair of major acquisitions under its belt since 2020, it is now a fully integrated steel machine with exposure to a range of growing end markets.
Cleveland-Cliffs is a play on the auto industry rebound, infrastructure spending, and the domestic manufacturing revival wrapped in one. 2022’s performance won’t be as impressive as last year’s, but there’s a longer-term growth trend here. At 4x earnings, this deep value play is a steal.
Will Toll Brothers Stock Keep Going Up?
Homebuilders have taken it on the chin this month and Toll Brothers (NYSE: TOL) is no exception. The prospects for rising interest rates have been perceived as a threat to homebuilding activity. In turn, Toll Brothers stock has slumped 19% year-to-date giving it a depressed sub-20 RSI reading.
This has created an attractive entry point for a stock that was as red-hot as the housing market last year. While the average 30-year fixed mortgage rate has trended higher in recent weeks and stands to rise further, at 3.56%, it is still well within striking distance of historic lows. So, while this could deter some would-be homebuyers from building an upscale home, demand should remain strong. Plus, with the existing home supply still limited relative to demand, homebuilding remains a viable housing solution and a sound investment.
Since the pandemic started, Americans’ view of the home has changed dramatically. It is not only a sacred place to spend time with family, but a place to work, and even a place to exercise. This means, people are willing to spend more on housing, renovations, and repairs. And with these trends likely to have staying power, Toll Brothers should be a beneficiary of a healthy housing environment for several years to come. At 10x earnings, it’s a great time to build a position.
Should I Sell Badger Meter Stock?
Badger Meter (NYSE: BMI) climbed to an all-time intraday high of $112.36 last month but has since seen nearly $23 trimmed from its share price. The slide has accelerated in recent days and the RSI briefly dipped below 10 for the first time since December 2018. Absent any company-specific news, this is good news for investors in search of an oversold mid-cap.
Having been in the business for over a century, the phrase water technology and Badger Meter are synonymous these days. The company sells a range of equipment that helps customers measure water flow and quality, the latter of which has become an increasingly important need post-Covid. And with a growing focus on water sustainability and many companies wanting to enhance their ESG-friendly status in the market, Badger Meter’s products should be a hot commodity this decade.
On January 28th, Badger Meter will present fourth-quarter earnings. If it goes as analysts expect, management will deliver EPS of $0.47 for the quarter and $1.96 for the full year which translates to 17% annual profit growth. Bottom line growth is expected to revert to the high single digits in 2022, but this is consistent with the company’s steady track record of growth.
Technologies like automated meter reading and remote-controlled water flow restriction are becoming mainstream. This is why existing Badger Meter shareholders should feel comfortable just going with the flow.
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