If you look at the chart above you will see that the Russell 2000 has been trading in a range for the past 7 months. The high point has been 1,208 and the low point has been 1093. With the Russell just closing today at 1101, I think that this means that stocks should be bought. The low-end of the range has been tested in February and May. After these tests the index has increased to the high of the range. As you can see in the chart below the Relative Strength index is near the lowest point it has been at in the past 2 years. The relative strength index is a contrarian indicator. If it is below 30, then this means the index is oversold. It is currently at 34, so it is right above that mark.
With this opinion in the back of your head, I would like to briefly touch on one stock that I believe you should buy and one stock you should consider going short.
The stock that I believe you should buy is Michael Kors (KORS) and the stock I believe you should short is GoPro (GPRO). I wrote lengthy articles on both stocks on seeking alpha. Here is a link to my article on Michael Kors. Here is my link to my article on GoPro.
The street is currently worried about the possibility of discounting bags at stores such as Macy’s. This could hurt the image of the brand as a luxury product. At the current price, I believe that market has priced in these worries into the stock. It is currently trading at a PE multiple of only 15 times next year’s earnings. This is coming from a company that had 18.7% sames store sales growth in its North American stores. The company is diversifying away from its leather goods dependency; it is expanding into other areas such as fragrances, eye-wear, footwear, menswear, and jewelry. The management team is mostly made up of the people who created the Tommy Hilfiger brand, so they know how to create lasting luxury brands. Currently the 14 day RSI is at 28. The oscillator is flashing buried. This means that the stock has had an RSI below 30 for 3 or more days. Michael Kors is a buy at the current price it is trading at.
For full disclosure, I personally shorted GoPro in July when it was in the high 40s and covered it when it was in the mid 30s. The stock is currently trading at meteoric levels. I would short it now personally, but there are no shares available for me to short with the company that I have my trading account with. The stock is trading at an astounding PE multiple of 134 times next year’s earnings. The 14 day RSI is at 87.5. Remember I stated that anything above 70 means that it is overbought. The oscillator is also buried for this stock. The negative thesis behind the trade is simple. The company is in a business that will be over run by smartphones. Smartphone cameras have been getting better and better every year and are displacing the need for DSLRs. The street is banking on the monetization YouTube content that users are generating with the GoPro cameras. This business has yet to generate any revenues. I believe it is very speculative to base your buying thesis on this. It has been a parabolic movement upward that will not end well for shareholders who purchased the stock at these elevated levels.
In conclusion, I believe the Russell 2000 is oversold and that you should go long KORS and short GPRO.
Thanks for reading!