Over extension of a stock's sell off can be an investor's great friend. Yet fishing for bottoms is often times a sucker's game just the same. And merely saying a stock is going to go back up just because it used to be valued higher and should bounce back is Average Joe investor ignorance at its depths.
The only way to catch falling knives is from a strictly fundamental basis. An RSI below 20 we can properly call a falling knife, but one that reasonably can be assumed to be nearing the floor.
Finding and purchasing strong companies in a precarious position rides the line between genius and foolhardiness, but not to such a great extent if the investor takes a long view. Well managed companies in decently strong markets should over the long term come back and continue to grow, and the seeming fickleness of the equity markets can be used as an advantage to the investor so long as patience can be observed.
Here are three candidates for medium or long term holding that have been in short term free falls with RSIs under 20.
Arcelor Mittal (MT)
Closing price as of 4/5/2013: $12.13
RSI of 19.91
Largest steel producer in the world with about 8% of worldwide production. Stock is presumably falling hard on poor data coming out of Europe lately and not an exactly robust steel market worldwide for a number of years now. Still though, a dip into the $12 range is previously uncharted territory for the stock in the context of the last few years, trading at an intensely low .36 P/B and sporting a 5.28% dividend. If fundamentals in Europe continue to deteriorate and a U.S market pull back were to occur it's possible MT could be bought at a very significant discount to long term earnings projections in the time frame of the next 1-5 months. No telling really how long this stock could languish but the risk/reward seems to be compelling at this level for a patient buy and hold investor. In fact many metrics seem to point to an undervaluation when compared to other large cap steel makers like (PKX) (NUE) (TS) and (GGB).
Mitsui and Co. Ltd. (OTC:MITSY)
Closing price as of 4/5/2013: $254.60
RSI of 18.65
A large Japanese trading house with healthy earnings projections for 2013 and a dirt cheap 5.71 TTM PE and a 3.6 Forward PE valuation, MITSY is not a slam dunk by any means. YoY earnings decline in the last quarter, falling commodities prices and the rather undesirable situation of operating in a country that can't pull itself out of a multi-decade funk and in close proximity to and in bad relations with North Korea approaching a boiling point geopolitically. Not to mention anemic trading volume for such a large issue. Given all the negatives I still think the case be made that MITSY is in fact a bargain, with high projected growth and a low valuation, in a momentary free fall. It is by far the cheapest Japanese company with a market cap over $20 billion by a lot of metrics.
Homex Development Corp. (HXM)
Closing price as of 4/5/2013: $8.73
RSI of 19.90
There is very little, if anything, to be pleased with as an investor in HXM in the past month. Surprise earnings losses when healthy earnings were projected doesn't exactly resonate well with Wall Street. Homex is in a period of transition in the fundamentals of their business due to new Mexican regulations regarding subsidies of the houses it builds, but management believes it can deal well with the new landscape and return to normalcy within a few years. The short side doesn't seem to think this surprising downer news has run its course fully, as short interest sits at 11.63%. The valuation seems cheap for its risk/reward profile, and any further dip in the stock's price could be an opportunity for better longer term results.
In conclusion, while some may appear attractive none of these stocks are squeaky clean.
All three find themselves in periods of stress due to deteriorating fundamentals and other factors, with intense sell offs occurring. If patience is a virtue you, the investor, has the opportunities to take advantage of. Mexico is a strongly growing country with a rising standard of living, that's a long term positive for a home builder. Arcelor Mittal has world class management overseeing a rough industry landscape. Mitsui is just plain dirt cheap. Time can solve these types of things, and when it does the capital appreciation from any of these stocks may indeed be quite substantial, especially if a U.S market pullback were to draw these names down that much further and present better entry points.