Let’s face it, bottom picking stocks is a very risky strategy. It takes a lot of courage for any trader or investor to pick up companies that falling and hope that you may have caught the bottom. However, if traders are lucky enough to pick the bottom, they will be rewarded handsomely. The allure of finding stocks that can gain back 50% or even 100% of what they lost is a very enticing prospect for any investor, even with a higher chance of the market proving them wrong. But what if instead of finding the bottom, why not choose the ones that already bottomed and are starting to recover instead? Doesn’t that sound better?
Selecting your stocks
When it comes to taking advantage of a company that is recovering, there are methods that traders and investors can use. Most differences will be based on investment philosophy, risk appetite, and strategy. In this article, we will look at buy-rated dividend companies that are recovering from a “recent bottom.” Since we want to invest in companies that are more likely to be picked up by investors, we want to choose “big names” that get lots of attention. Companies with analyst following, buy recommendations, and offer income through dividends that are currently trading cheaply in terms of price provide a well-balanced quality that can appeal to a broader set of market participants that can potentially increase trading volume.
Finding the signs of recovery and the mark of a bottom
When I saw recovering from a “bottom," I mean, let’s consider names that are trading near their year-low or 52-week low. This ensures that we are only looking at companies that can potentially have a lot of room to recover. Then we can adjust the screen and look at companies that have just moved into bullish territory in their RSI (momentum oscillator that measures the rate of change of the security's momentum). These will be stocks that just crossed their 50 mark or are now trading near that level after crossing above - allowing us to only look at companies that have started trading upwards.
Now that we know what to look for and consider, let’s look at some companies that meet these criteria.
Chubb Ltd (CB)
Dividend Yield: 1.76%
Analyst rating: Moderate Buy
Chubb Limited is a Switzerland-based holding company that provides clients a range of insurance and reinsurance products and services globally. It operates in 5 segments:
- North America Commercial Property and Casualty (P&C) Insurance
- North America Personal P&C Insurance
- North America Agricultural Insurance
- Overseas General Insurance
- Global Reinsurance and Life Insurance
The company offers commercial insurance products and service offerings, such as risk management programs, engineering and complex claims management, and loss control. The company provides specialized insurance products for different areas, such as energy and aviation. The company also offers personal lines insurance coverage, including homeowners, automobile, umbrella liability, valuables, and recreational marine products. In addition, it supplies personal accident, life insurance, and supplemental health insurance to individuals in select countries.
Will it go up or down?
CB is trading in a tight range between $183.00-$202.00 after retesting its new year-low. Prices are starting to increase, and retesting the $202.00 area with rising volume is a sign of trade participation. Prices have also broken out of the RSI 50 midline but fell short afterward and registered a 49.53. However, with prices still trying to establish their direction, it still offers good potential return should prices move back up to last year's high of $231.37, alongside its dividend income.
Archer Daniels Midland (ADM)
Dividend Yield: 2.38%
Analyst Rating: Moderate Buy
Archer Daniels Midland Company is a global food processing and commodities trading organization. It was founded in 1902 by George A. Archer and John W. Daniels. The company's name came after buying the Midland Linseed Products Company. Today, the company is headquartered in Chicago, Illinois.
ADM has 62 innovation centers, 327 processing plants, and 520 procurement centers across six continents. In 2021, the company had roughly 41,000 active employees.
The company is mainly divided into three segments:
- Ag Services and Oilseeds segment: includes the production, marketing, crushing, and extra processing of oilseed crops, such as soybeans and soft seeds, into vegetable oils and protein meals.
- Carbohydrate Solutions segment: also known as the Corn Processing segment, makes sweeteners and starches out of corn.
- Nutrition segment: provides proteins, dietary fiber, organic nutritional and health products, including probiotics, prebiotics, enzymes, and herbal extracts, as well as specialized foods like edible beans, formula feeds, and health and nutrition commodities for animals.
The company also has two minor segments:
- Agricultural Services segment: provides storage, cleaning, and transportation services for agricultural products.
- ADM Investor Services, Inc.: provides institutional and individual clients with brokerage services.
Is it time to buy?
ADM has recently tested its 52-week low around the $70.00 area and saw a resurgence of buying from investors, reviving momentum into ADM. It is currently trading in a tight bearish channel, and its RSI recently broke above the 50 midline and is still trading in the bullish RSI range. Traders and investors wanting to position on ADM for a potential test of its resistance around the $98.28 mark can wait for a breakout of the channel to ensure that there is strong buying pressure for ADM or wait for another retest on the $70.00 area for a double-bottom play.
NextEra Energy (NEE)
Dividend yield: 2.47%
Analyst rating: Strong Buy
NextEra Energy, Inc. is an electric power and energy infrastructure company that operates through its wholly-owned subsidiaries:
- Florida Power & Light Company (FPL)
- NextEra Energy Resources, LLC
- NextEra Energy Transmission, LLC (collectively, NEER)
FPL is a rate-regulated electric utility business that supplies electric service to approximately 5.8 million customer accounts in the lower west and east coasts of Florida and throughout eight counties of northwest Florida. FPL is primarily engaged in generating, distributing, transmitting, and selling electric energy in Florida. Its NEER segment owns, constructs, develops, manages, and operates electric generation facilities in the wholesale energy markets in both the United States and Canada. NEER also has assets and investments in other businesses that gave a clean energy focus, such as battery storage and renewable fuels.
Will we see a breakout?
NEE is have been contracting as prices have been moving below a downward-sloping trendline while maintaining short-term support around the $73.30 area. Price touched its 52-week low at the start of March and established a new low but was quickly defended by buyers. RSI has already broken out of its volatility contraction and is trading within the bullish area above the 50 midline. Traders who want to take positions in NEE can wait for a confirmed breakout of the trend line or wait for prices to test its short-term support with a very tight stop in case prices continue to test at their 52-week low.
Final Thoughts
No matter how attractive the price of a stock is, investors and traders should always remember its inherent risk. Even though it is rewarding when you are right, it can also be devastating to your overall portfolio should you have no risk management in place. It is always important to have risk management as a key aspect of any strategy, as it is okay to be wrong than to be wiped out.
On the date of publication, Rick Orford did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
