3 Beaten-Down Stocks Making a Statistical Case for a Comeback

Market losers aren’t difficult to find at all. The real trick is to find the ideas that offer a realistic chance of upside. Otherwise, what may appear to be a discount could easily turn out to be a bull trap. It’s here that the financial publication industry attempts to extract alpha from the ashes of volatility. If we’re being honest, though, most of the content amounts to mere opinions.

That’s not necessarily a problem in and of itself. Obviously, whether an investment is truly worthwhile can only be validated in the unknown future. Inherently, any forecast will involve speculation. Still, a massive difference exists between a gut feeling — which can be swayed by circumstances and emotions — and an empirical methodology.

To decipher arguably the best course of action (from a near-term trading perspective), I developed a comprehensive forecasting model, which includes three core elements:

• Pathway-dependent analysis: This line chart shows various potential pathways derived from past analogs.

• Baseline probabilities: Each week up to 10 weeks out features a Bernoulli trial of long-side success, which collectively creates a binomial proportion estimate.

• Markovian distribution: Each week features a conditional probability of upside success based on how the sequence of the last 10 weeks impacts the forward 10 weeks.

Perhaps the best way to explain the model above is to use a baseball analogy. Pathway-dependent analysis is the estimation of what could happen depending on where the ball is placed. Baseline probabilities refer to a player’s batting average, essentially the likelihood of putting the ball safely into play. And the Markovian distribution is the situational batting average — the average, for example, when there are runners in scoring position.

Just like in America’s favorite pastime, the use of sabermetrics doesn’t guarantee that you’ll win baseball games. However, a consistent, empirical framework can help focus your trading and curb distracting emotions. As well, you may be able to identify opportunities ahead of the crowd — such as these three beaten-down stocks.

While biopharmaceutical giant Amgen (AMGN) managed to eke out a modest gain on Friday, the past week has been rough, with AMGN stock losing 4%. Adding insult to injury, the equity is rated as a 72% Strong Sell by the Barchart Technical Opinion indicator. Despite the volatility risks, contrarians could be justified in betting on the healthcare juggernaut.

In the past 10 weeks, AMGN stock has printed a 3-7-D sequence: three up weeks, seven down weeks, with an overall downward trajectory across the period. This quantitative signal is rare, having only materialized 29 times on a rolling basis since January 2019. In the early weeks following the flashing of the signal, the probability of upside isn’t all that much greater than the baseline probability.

However, in the fourth week, the upside probability stands at 65.5% — much higher than the baseline probability of 48.8% during the same projected time period. While this trade may require some patience, AMGN stock tends to move higher following a distribution-heavy sequence.

Further, under the 3-7-D pathway, the 50th-percentile price lands around $277.50. Given this information, I used data pulled from my Barchart Premier account to extract the most aggressive but realistic trade. In my opinion, that would be the 275/280 bull call spread expiring Oct. 24.

One of the more intriguing next-generation energy companies, Enphase Energy (ENPH) popped higher last month, likely due to short-squeeze speculation. As of the latest estimate, the short interest of ENPH stock stands at around 20% of its float. That’s a very elevated figure and because short trades are credit-based transactions, their obligatory nature makes short squeezes very powerful.

However, the contrarian rally seems to have encountered a corrective spell. On Friday, ENPH stock dipped 1.56%, while over the trailing week, it suffered a more than 8% loss. Quantitatively, ENPH has printed an unusual 6-4-D sequence: six up weeks, four down weeks, with an overall negative trajectory. Despite the accumulation-heavy sequence, Enphase still incurred a loss of market value.

Still, history shows that in the early weeks, the bulls tend to buy the dip. As an overall baseline probability, ENPH stock isn’t that much better than a coin toss. In fact, in some weeks, it’s worse. However, under the 6-4-D pathway, the odds of upside success tend to be higher than normal. Plus, the “halfway percentile” price keeps steadily rising into the sixth week.

Based on this intel, I believe the trade that makes the most sense is the 37/40 bull call spread expiring Oct. 24. Should the $40 strike price be triggered at expiration, the payout stands at nearly 142%.

Another high-risk, high-reward candidate, Dutch Bros (BROS) has been on a rollercoaster ride. Since the start of the year, BROS stock has only gained 1.37%. That sounds like a slovenly performance until you look at its chart — this bad boy is all over the map. Certainly, the volatility makes it a rough investment but day traders love the kinetic energy.

To be upfront, the Barchart Technical Opinion indicator rates BROS stock as an 88% Strong Sell. It’s not for the faint of heart. However, what I like about the stock is its contrarian tendencies. In the trailing 10 weeks, BROS printed a 3-7-D sequence. Ordinarily, such a distribution-heavy sequence would arouse deep skepticism. But with the drive-through coffee chain, it tends to be an invitation to speculation.

Basically, the 3-7-D has flashed 18 times on a rolling basis since January 2019. In certain weeks, it actually has a 100% upside probability. Now, that figure needs to be taken with a huge grain of salt because of the small sample size (with Dutch Bros launching its IPO in September 2021). Also, a rolling basis means that the data points are not independent.

That said, market gamblers may be tempted by the 55/58 bull call spread expiring Oct. 31. If BROS stock rises through the second-leg strike price at expiration, the max payout stands at nearly 161%.

On the date of publication, Josh Enomoto did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. This article was originally published on Barchart.com