Two Excessively Oversold Stocks with 25% UpsideJuly 9, 2018
In 2005, 450 sheep jumped to their deaths.
One sheep dove. Another followed. All of a sudden, a flock of sheep began jumping off a cliff for no real reason. Shocked shepherds would watch as another 1,500 jumped.
Hundreds of sheep perished, as they got caught up in herd mentality.
Each followed and jumped simply because every other sheep was doing it.
And as uncommon as this may sound, it’s not.
In fact, this very same thing happens each and every day among traders and investors.
We buy because everyone else does. We sell because every one else does.
But we never question what we’re really buying or selling, which can be quite costly. Instead, we take the leap simply because every one else is doing it.
And if every one else is doing it, it must be right. Right? Well, not exactly…
The herd is often wrong. And if you can spot where the herd is often wrong, you’ll spot opportunity.
Take a look at Adobe Systems (ADBE) and Raytheon (RTN), for example. These two stocks were butchered by the herd for no real reason, creating an opportunity we just can’t ignore.
Adobe Systems (ADBE)
In recent weeks, shares of Adobe Systems pulled back even on strong earnings. However, it again caught support at its 50-day moving average, as it has done since early 2016. As long as this support line holds, as we expect it to do, we believe the stock could rally to $260, near-term. The company recently posted EPS of $1.66 as compared to estimates for $1.54. Revenue came in at $2.2 billion, as compared to expectations for $2.16 billion. With respect to guidance, Adobe said it’s expecting $1.68 EPS on revenue of $2.24 billion in the fiscal third quarter. Analysts forecast $1.61 in EPS on revenue of $2.23 billion in revenue.
There are two ways to trade the stock here. One is to buy the stock at market prices. The other is to buy to open the ADBE August 17, 2018 255 calls, which last traded at $5.03.
After pulling back on trade war fears, RTN caught support at $190 an is just beginning to pivot higher off its lows. From this point, we’d like to see the stock back at $210 a share, near-term. In short, the stock is excessively oversold at the moment, and is well worth the risk. There are two ways to trade RTN here. One is to buy the stock at market prices. The other is to buy to open the RTN August 17, 2018 200 calls, which last traded at $3.85.