Hey Trader,
Nvidia is cheap and sitting in bear market territory. I’m still not buying oversold stocks like this one.
A bear market means a drop of 20% or more from a high. Nvidia has fallen further than that since early October.
Traders see oversold and cheap and assume they’ve found a buy signal. That’s not how it works.
Nvidia trades at 22x earnings right now. I think the market could drag that down to 10x or lower.
Buy it here, and you could watch half your money disappear.
Before buying oversold stocks, I put each one through three tests:
- Oversold. The stock has fallen so far, so fast that sellers look worn out.
- Cheap. You’re paying a low price for every $1 the company earns.
- Tailwind. Something is pushing the business forward, so the stock has a reason to recover.
Nvidia passes the first two. It fails the third.
I hold my own signals to the same standard.
I’ll take you through each test I use before buying oversold stocks. You’ll know which ones deserve your money and which can still get cut in half.
Let me start with why oversold alone is a bad reason to buy.
Test One: Oversold Only Earns A Closer Look
Oversold is the first test. It’s also the easiest one to pass.
A stock that’s fallen hard and fast earns a spot on my watch list. That spot is all it earns.
Buying oversold stocks on that signal alone means mistaking every drop for a bargain.
Nvidia passes this test easily. Shorts are covering, and buyers are jumping in for a quick bounce.
That rebound is called a dead cat bounce. It’s a short pop inside a stock that’s still falling.
You can scout a bounce like this for 10 or 20 points if you want. I won’t stop you.
Buying oversold stocks just because they’ve dropped is a bad reason to own them. I think Nvidia could fall a lot further from here.
Oversold stocks can stay oversold longer than you’d think.
An oversold stock can always get more oversold.
Test Two: Cheap Means Real Earnings At A Low Price
Next, I check what I’m paying for every $1 the company earns. That number is called the multiple.
A stock can’t be cheap without earnings behind it. I don’t buy stocks that lose money at any price.
Those stocks can go from 800 to zero quickly. Run this check before buying oversold stocks, so you never confuse a crashed stock with a cheap one.
Nvidia passes this test too. It trades at 22x earnings right now.
Cheap can still get cheaper. I think the market could push that multiple down to 10x or lower.
If it gets there, I’ll load the boat and start looking. At today’s price, I’m not interested.
Micron shows what cheap looks like to me. It’s an $800 stock earning $33 a share.
I used to cover semiconductors as an analyst. I believe Micron trades at half its intrinsic value right now.
Test Three: A Tailwind Gives The Stock A Reason To Recover
A tailwind is a force pushing a company’s business forward. Without one, a cheap stock has nothing to lift it.
Nvidia fails this one. The company could soon face tougher rules on selling chips to China.
If China turns its back, I don’t know where Nvidia’s growth comes from. Other buyers could walk away too.
I don’t see a turnaround story here just yet. Passing the first two tests isn’t enough for me.
Skip this test when buying oversold stocks, and you’ll keep buying as they get cheaper. That’s how 22x turns into 10x.
Your money gets cut in half along the way.
Cheap without a tailwind is just a stock getting cheaper.
Why I Wait For All 3 Tests Before Buying Oversold Stocks
I never fall in love with a chart. I dig into the valuation, the financial ratios, the tailwinds, the headwinds and the competition.
Today, one stock flashed a Genesis COG buy signal on its chart. I passed anyway, because the company loses money.
A good-looking chart never gets my money on its own.
Nvidia’s story isn’t over. When I’m buying oversold stocks, two out of three tests doesn’t get my money.
Waiting on Nvidia doesn’t mean I stop trading. My Burn Signal alerts fire on the quiet stocks nobody’s talking about.
Every Burn Signal starts with a lonely candle on a quiet chart. At least one more sign has to line up behind it before the alert goes out.
One of those signs tracks money moving in or out before the price does. A stock has to earn the trade before I take it.
That discipline keeps me from buying oversold stocks with no reason to recover.
Each alert gives you the ticker, the signs that triggered, a stock play and an options play. You decide how to trade it.
Alerts come about twice a week. Every loser on the record is shown, right alongside the winners.
You’re covered by a 30-day money-back guarantee. You also get a new 90-day, 10-trade guarantee.
Professor Jeffrey Bierman
Creator of the Genesis COG System
