After the Selloff
The Nasdaq Composite lost 2.9% Friday and another 1.1% Monday. Some stocks took a much bigger hit even as their businesses improved. Twilio fell 15.2% Friday after reporting 20% revenue growth and raising its full-year free cash flow outlook.
The chart below shows how sharply tech momentum has reversed. Morgan Stanley’s U.S. tech, media and telecom momentum factor is about 62% below its 12-month high, a deeper drawdown than the same gauge saw during the dot-com bust.
When a good business gets caught in a selloff, timing matters. We look for the first signs that a stock is turning while it’s still well below its recent high and the business case holds up.
How We Look for an Early Recovery
Our Fundamental Early Recovery screen starts with stocks we already follow that are at least 20% below their highest close over the past 63 trading sessions. We look for a close above each of the previous five closes. We also want 14-day RSI, a measure of price momentum, at 35 or higher and above its reading five sessions earlier.
Then we revisit the investment case. Has management held or raised its outlook? Are the operating numbers that matter to the thesis holding up? The price test tells us buyers are starting to come back. The business test gives us a reason to consider joining them.
Where We See an Opportunity Today
Today’s trade is on a consumer platform in an emerging market. Once a platform has attracted customers, it can grow by giving them more reasons to come back. We look for that extra activity to turn into operating profit. In its recent report, the company beat revenue estimates and raised a key measure of expected full-year profitability by nearly 10%.
Below, we’ll look at the company and how we’re structuring a trade with time for the next two expected earnings reports.
