Bears Beware: Heavily Oversold Markets Can Mean Unforgiving Rallies

Before you go, we thought you'd like these...
Before you go close icon

Markets rallied on Wednesday following a joint statement from Angela Merkel and Nicolas Sarkosy pledging to aid Greece.

Bearish skepticism about a Greek default combined with other concerns have largely been aggressively priced in. As a result, even the smallest political actions and rumors have sent the markets back and forth with anticipation.

The market's tight connection to the political arena made Wednesday's announcement a bullish turn-around for many. But bears beware: Investors watched as the optimism quickly left oversold stocks subject to short squeezes from short-sellers.

This sudden bullish optimism is not permanent. More news, good and bad, is likely to price in over the coming days and weeks.

"Unfortunately, this one-day wonder does not tell us too much about the future. The markets were very oversold, and due for a rally at some point. The trading goddess decided for one reason or the other that this point was yesterday," said Philippe Gijsels, of BNP Paribas Fortis Capital Markets in Brussels to CNBC.com.

But Gijsels points out that the market's extreme level of oversoldness means capitulation -- a point where all bad news has been priced in and the market begins to rebound -- could be on the horizon. He argues that when a strong rally does hit the market, it will likely be sharp, quick, and "[won't] look back."

So, which stocks appear to be most undervalued? For ideas, we can ran a screen on companies that appear to be undervalued relative to the price to earnings growth (PEG) ratio.

All of the stocks mentioned below have PEG ratios below 1, meaning that they are trading at a discount relative to projected earnings growth.

In addition, all of these companies have proven themselves to be more profitable than their competitors, and have also seen significant institutional buying during the current quarter.

Big money managers seem to think these profitable stocks are undervalued, and ready for a bounce -- do you agree? (Click here to access free, interactive tools to analyze these ideas.)

1. Las Vegas Sands (NYS: LVS) : Develops, and operates various integrated resort properties primarily in the United States, Macau, and Singapore. PEG ratio at 0.69. Net institutional purchases in the current quarter at 18.4M shares, which represents about 4.6% of the company's float of 399.97M shares. TTM gross margin at 46.99% vs. industry average at 37.41%. TTM operating margin at 23.75% vs. industry average at 19.31%. TTM pre-tax margin at 19.82% vs. industry average at 17.83%.

2. Urban Outfitters (NAS: URBN) : Operates lifestyle specialty retail stores under the Urban Outfitters, Anthropologie, Free People, Terrain, Leifsdottir, and BHLDN brands. PEG ratio at 0.91. Net institutional purchases in the current quarter at 8.1M shares, which represents about 7.77% of the company's float of 104.27M shares. TTM gross margin at 43.4% vs. industry average at 38.51%. TTM operating margin at 15.66% vs. industry average at 10.09%. TTM pre-tax margin at 15.84% vs. industry average at 9.38%.

3. Guess? (NYS: GES) : Engages in the design, marketing, distribution, and licensing of apparel and accessories for men, women, and children. PEG ratio at 0.81. Net institutional purchases in the current quarter at 4.5M shares, which represents about 5.94% of the company's float of 75.72M shares. TTM gross margin at 43.92% vs. industry average at 38.51%. TTM operating margin at 11.98% vs. industry average at 10.09%. TTM pre-tax margin at 16.2% vs. industry average at 9.38%.

4. DeVry (NYS: DV) : Provides educational services worldwide. PEG ratio at 0.84. Net institutional purchases in the current quarter at 2.3M shares, which represents about 3.75% of the company's float of 61.39M shares. TTM gross margin at 60.25% vs. industry average at 53.54%. TTM operating margin at 22.64% vs. industry average at 21.78%. TTM pre-tax margin at 22.66% vs. industry average at 18.32%.

5. Cellcom Israel (NYS: CEL) : Provides cellular communications services in Israel. PEG ratio at 0.72. Net institutional purchases in the current quarter at 2.8M shares, which represents about 5.84% of the company's float of 47.97M shares. TTM gross margin at 61.68% vs. industry average at 59.97%. TTM operating margin at 28.87% vs. industry average at 21.33%. TTM pre-tax margin at 23.83% vs. industry average at 14.88%.

6. Express (NAS: EXPR) : Operates specialty retail stores in the United States. PEG ratio at 0.77. Net institutional purchases in the current quarter at 6.8M shares, which represents about 19.75% of the company's float of 34.43M shares. TTM gross margin at 39.51% vs. industry average at 38.51%. TTM operating margin at 12.32% vs. industry average at 10.09%. TTM pre-tax margin at 10.44% vs. industry average at 9.38%.

7. MasTec (NYS: MTZ) : Engages in the engineering, building, installation, maintenance, and upgrade of energy, communication, and utility infrastructure in North America. PEG ratio at 0.82. Net institutional purchases in the current quarter at 3.0M shares, which represents about 4.76% of the company's float of 63.04M shares. TTM gross margin at 15.65% vs. industry average at 11.9%. TTM operating margin at 8.29% vs. industry average at 5.1%. TTM pre-tax margin at 8.21% vs. industry average at 4.32%

Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.


Kapitall's Becca Lipman and Eben Esterhuizen do not own any of the shares mentioned above. Institutional data sourced from Fidelity, all other data sourced from Finviz.

At the time this article was published The Motley Fool owns shares of Guess. Motley Fool newsletter services have recommended buying shares of Cellcom Israel. Motley Fool newsletter services have recommended writing covered calls in Guess. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Read Full Story

Want more news like this?

Sign up for Finance Report by AOL and get everything from business news to personal finance tips delivered directly to your inbox daily!

Subscribe to our other newsletters

Emails may offer personalized content or ads. Learn more. You may unsubscribe any time.

From Our Partners