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Are These 2 Oversold Stocks Worth Another Look?

Mat Litalien, MBA
Where to Invest?

There are a few key metrics that investors can use to determine a good entry point for a particular stock. One such indicator is the 14-day relative strength index (RSI). The 14-day RSI is one of the most commonly used momentum indicators.

An RSI over 70 signifies that the stock is overbought and may be due for a correction. Conversely, an RSI below 30 is a sign that the stock is oversold and may be due for a short-term bounce. Two stocks that have touched an RSI below 30 recently are MTY Food Group (TSX:MTY) and Uni Select (TSX:UNS). Does recent weakness mean a good entry point? Let’s take a look.

MTY’s fourth-quarter results

MTY Food Group was cruising along until it released fourth-quarter and year-end results. Before results, the company was up approximately 15% in 2019. After it missed on earnings, the company’s stock price crashed and it is now down about 2% year to date.

The fourth quarter wasn’t all bad, however. Although earnings of $0.54 missed by 26%, revenue of $108.52 million beat by 25%. Of concern, same store sales dropped by 1.3% year-over-year. The company pointed to unusual weather patterns south of the border as having the most significant impact on this metric.

Given the pace of acquisitions, the company has many non-recurring expenses, which leads to significant earnings volatility. However, the company is growing sales at a 20%+ clip and cash flows are experiencing equally strong growth. Last month, the company raised its dividend by 10%, as it expects cash flows to remain strong through 2019.

The headlines have led to overreaction and MTY’s stock is oversold. It is now trading at a cheap price-to-earnings (P/E) of 14.89 and a P/E to growth (PEG) of 0.86. Given its impressive track record, expected growth profile and cheap valuations, MTY is due for a bounce.

Uni Select fourth-quarter results

Much like MTY, fourth-quarter and year-end results was the catalyst for Uni Select’s recent price correction. Since reporting earnings last Wednesday, the company’s stock price has lost almost 35% of its value. It’s therefore no wonder that the company has quickly entered oversold territory.

Uni Select earnings of $0.13 missed by 28% and revenue of $419.45 million missed by approximately $2 million. In 2018, revenue grew by 21% on the back of recent acquisitions while organic sales eked out a 1.5% gain. Particularly concerning are margin pressures, which are expected to continue along with an expected drop in profitability. The company also remains without a permanent president and CEO. Certainly, the lack of leadership at the top is certainly a headwind.

As of writing, Uni Select has jumped from an RSI of 19 to 28 and as such, still has room for an upwards move. However, the company lacks a clear path to growth, is without a CEO and is trading at valuations (P/E, PB, PEG), in line with industry averages. I expect continued volatility in the stock.

Foolish takeway

Although both MTY Group and Uni Select are currently oversold, MTY is the more reliable long-term play. Both may experience a short-term bounce, but MTY’s looks more sustainable over the long term.

More reading

Fool contributor mlitalien has no position in any of the stocks mentioned. The Motley Fool owns shares of MTY Food Group. MTI is a recommendation of Stock Advisor Canada.

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