I'm not a big fan of technical analysis, except when it makes intuitive sense. The multiple bottom is a technical measure that I have used numerous times to pick a ripe stock poised for a breakout. It doesn't always work, but when combined with other evaluation techniques, it can help identify a good entry point.
Here's the general rationale: as a falling stock tests and re-tests a price level (a.k.a. support level) without falling below that level, it suggests that significant buying pressure exists at that level. It could also suggest that holders aren't willing to sell at that level. Multiple bounces along a bottom strengthen the hypothesis. As the stock bounces up from support levels it hits a resistance level that too is often re-tested. This resistance level suggests a price point at which holders are willing to sell. But as the resistance is re-tested and the 'weak hands' are reduced, selling pressure subsides. A break (particularly on high volume) above this resistance level signals that a new upward trend may have started.
There are other interpretations of the multiple bottom, but most generally follow this line of thought.
I have found seven stocks that have tested and re-tested bottoms over the past several months, only one of which appears to have broken out of the sideways pattern. While none of these patterns predict the future returns for a stock, the months-long sideways movement raise green flags for many investors.
(Note: this is not a solicitation to buy. Consult your financial advisor and do your own due diligence.)
(click charts to enlarge)
AU data by YCharts
GFI data by YCharts
PBI data by YCharts
CPNO data by YCharts
KGC data by YCharts
ARCO data by YCharts
USM data by YCharts
|(NYSE:AU)||AngloGold Ashanti Ltd.||Gold||South Africa|
|(NYSE:GFI)||Gold Fields Ltd.||Gold||South Africa|
|(NYSE:PBI)||Pitney Bowes Inc.||Business Equipment||USA|
|(NASDAQ:CPNO)||Copano Energy LLC||Oil & Gas Pipelines||USA|
|(NYSE:KGC)||Kinross Gold Corporation||Gold||Canada|
|(NYSE:ARCO)||Arcos Dorados Holdings Inc. Cla||Restaurants||Argentina|
|(NYSE:USM)||United States Cellular Corporation||Wireless Communications||USA|
I think the fact that these stocks have more-or-less moved sideways for several months is a good reason to do further investigation. To get you started, below I have summarized key metrics for each company.
In terms of valuation, the AU, GFI, KCG and USM appear interesting based on forward P/E and P/B ratios. However, beware of the South African gold miners as resource companies encounter social stress within the country.
Looking at dividend yields, PBI appears too good to be true. But, according to the graph below, it has paid a consistent, growing dividend over the years. Perhaps market valuations (and therefore the dividend yield) suggest the market is anticipating a dividend cut?
|Ticker||Dividend Yield||Payout Ratio|
PBI Dividend data by YCharts
It's important to note, it appears that PBI earnings is highly exposed to the business cycle, as the stock is highly levered. Note that different data sources show a different Debt-to-Equity ratio for PBI, but all are very high. Before anyone jumps head-first into PBI's dividend yield, I suggest a deep dive into the company's financials and prospects. Otherwise, you may get more than you bargained for.
PBI's leverage is amplifying its ROE, however this high ROE comes with a lot of potential risk. Meanwhile, AU, GFI and ARCO appear to be meaningfully profitable companies. Profitability ratios are displayed below.
|Ticker||Return on Assets||Return on Equity||Operating Margin|
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Disclaimer: This is not advice. While the author makes every effort to provide high quality information, the information is not guaranteed to be accurate and should not be relied on. Investing involves risk and you could lose all your money. Consult a professional advisor before making any investing decisions.
Data Source: Finviz.