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.
