How to Bottom-Pick a Stock

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Buying winning stocks hasn’t been working recently, so it could be time to start picking up the losers.

Top-performing shares, aka momentum stocks, typically stay hot because investors are naturally attracted to what’s been doing well. It’s a circular idea, but there’s usually no arguing with the results.

That’s not the case right now. The iShares MSCI USA Momentum Factor exchange-traded fund (ticker: MTUM) has dropped 24% in 2022, worse than the

S&P 500’s
18% decline. Momentum is among the worst-performing factors this year, trailing only growth. But even growth stocks have rallied in July—the Invesco S&P 500 Pure Growth ETF (RPG) has climbed 5.1%—while the Momentum ETF is up just 1%. So, chasing winners has been a losing strategy.

Buying losers hasn’t been rewarding, either.

Netflix

(NFLX),

PayPal Holdings

(PYPL), and

Bath & Body Works

(BBWI) have been among the S&P 500’s worst performers in 2022, and each has offered what looked to be a great opportunity to pick the bottom—only to continue falling. There’s a reason they say “never try to catch a falling knife” on Wall Street.

But a stock has to bottom at some point, and if you catch the right knife at the right time, the results can give your portfolio an edge. We recommended buying

Chewy

(CHWY) on May 27, just before its first-quarter earnings were released. The stock had dropped 54% in 2022, but has gained 63% since the pick was made. That’s every trader’s dream, but it requires getting the timing right—and a whole lot of luck.

Now might be a good time to test that luck. The

Russell 2000 Growth
index has fallen 26% this year, but has gained 4.6% in July. It’s early, but it could be a sign that what had been the market’s worst stocks could be set to perform at least less badly.

Oppenheimer

technical analyst Ari Wald. offers a screen for shares that look to be forming “bases.” He started with the bottom 40% of performers from the

Russell 3000,
to make sure he looked only at the real stinkers. Then he hunted for stocks with a current price above their 50-day moving average and that were trading above their levels from the fourth quarter of 2020, a sign that long-term strength is still intact.

The list does come with a warning: “All of these bases are still below their 200-day average, meaning their trend remains sideways-to-lower and trading could remain choppy,” Wald writes. Stocks that fit the bill include

Acushnet Holdings

(GOLF),

LeMaitre Vascular

(LMAT),

SPS Commerce

(SPSC), and Danaher (DHR).

Wald isn’t the only technical analyst looking to pick bottoms in stocks. MKM Partners’ JC O’Hara notes that shares of

Upwork

(UPWK), which helps companies find freelancers, recently broke above their 50-day moving average and could continue rising to at least their 200-day moving average, or $30.38. That would be 25% higher than Friday’s close of $24.25. It’s also near the $31 target set by MKM analyst Rohit Kulkarni, who notes that demand for Upwork’s services remains strong.

With earnings due on July 27, perhaps the shares can make that run sooner, rather than later.

Write to Ben Levisohn at [email protected]