This blue-chip stock has crashed… Now double-digit gains are likely
The bear market has just claimed another victim…
This telecom giant had avoided most of the carnage this year. Stable activity and a healthy dividend yield kept investors from fleeing. But everything changed in no time.
The stock crashed 12% in just three days towards the end of July. This rapid decline sent stocks to their lowest price since 2017. And it also set up a rare oversold setup.
It’s a damn good buying opportunity, based on the story. And we can expect a double-digit increase from here.
Let me explain…
The telecommunications industry was a high growth sector over the past decades. These days it has a lot more in common with “boring” utilities.
These companies keep our phones running and our internet fast. We need these services. But now the internet is everywhere… And instead of chasing huge outperformance, investors are buying telecom stocks for stability and security.
Verizon Communications (VZ) is the largest of the group. And as I said earlier, it had weathered this bear market wonderfully…until the end of last month.
A double-digit drop in just three days is rare for a steadfast “utility utility” like Verizon. And this fall plunged the title into oversold territory.
It’s based on the Relative Strength Index (“RSI”). This tool examines recent price action. And it measures whether a stock has gone too far, too fast in either direction.
Generally, an RSI above 70 tells us that the investment is overbought and a pullback is imminent. An RSI below 30 means the opposite. In the case of Verizon, its RSI dropped to 21. Take a look…
Verizon’s crash pushed its RSI well below the oversold threshold. This tells us that the decline is probably overdone…and that a rally is possible.
To test this, I looked at all instances where Verizon fell below and then climbed back above an RSI of 25. This is a classic pattern that shows the decline is over and a rebound is in Classes.
This kind of move has only happened 25 times since 1990. And the results are impressive. Looked…
Again, Verizon is a boring company. Most of its long-term returns come from dividends. Thus, since 1990, its share price has only increased by 1.7% per year (excluding dividends).
However, buying after an oversold RSI setup leads to much better results. Similar cases resulted in gains of 7% in three months and 11.6% over the following year. That’s a massive outperformance in a normally slow-moving title.
Of course, buying today would mean you are bucking the trend. This adds a degree of risk. But if you’re a long-term investor and need some yield in your portfolio, buying now gives you that with double-digit upside potential.
This makes it a profession worth considering today.