DELAFIELD, Wis. (Stockpickr) -- The market experienced heavy selling pressure on Thursday, with the Dow Jones Industrial Average dropping 160 points and the S&P 500 sliding lower by 17 points.
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Despite that bearish action, one chart pattern continues to show promise: beaten-down stocks that have entered extremely oversold territory. Stocks that share these characteristics have been working in this tough environment. Take, for example, biopharmaceutical stock Celldex Therapeutics (CLDX), which dropped from its February high of $33.33 a share to its May low of $10.76 a share. This stock has exploded higher over the last few trading sessions, with shares ripping from $10.76 to Wednesday's intraday high of $15.97 a share.
Another great example is intellectual property player Spherix (SPEX), which the bears pressured lower from its January high of $10.40 a share to its recent low of $1.19 a share. Shares of SPEX finally saw a respite to the selling pressure this week, when the stock rebounded off that $1.19 low and exploded higher to its intraday high on Wednesday of $1.94 a share.
The bulls finally had enough with the selling in both SPEX and CLDX, which had pushed these stocks into extremely oversold territory. Once stocks like SPEX and CLDX become extremely oversold, even the shorts know it's time to cover and lock in their profits and buy these stocks back to play the inevitable rebound trades.
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This is a theme that's been playing out over the last couple of weeks. Traders are coming after the beaten-down extremely oversold stocks and buying them in anticipation of rebound trades. The days of buying momentum names that show continuation moves to the upside are over for now. The new trend in the market is to buy the stocks with the worst charts that are beaten-down to depressed levels. This strategy doesn't appear to be ending anytime soon.
Part of the reason this strategy is working is that the shorts have been successful in knocking down a ton of momentum names, small-cap plays and tech and biotechnology stocks to extremely oversold readings in very short timeframes. This has created a situation where it doesn't take much buying pressure from the remaining bulls to spike these beaten-down names dramatically higher since most of the natural sellers of these stocks have been cleared out during their sharp falls.
One beaten-down oversold stock that didn't go down on Thursday during the market carnage was display manufacturer Himax Technologies (HIMX), which rose modestly during Thursday's trading session by 1.4% to $7.07 a share.
Shares of Himax Technologies has been hammered lower by the short-sellers over the last two months, with shares plunging lower from a high of $16.08 to a recent low of $6.65 a share. Shares of HIMX are now down 51% so far in 2014, which has produced large profits in a very short timeframe for any of the short-sellers involved in this name.
Himax Technologies has a market cap of $1.2 billion and an enterprise value of $1.1 billion. This stock currently trades at a very cheap valuation, with a trailing price-to-earnings of 19.2 and a forward price-to-earnings of 11.7. Its estimated growth rate for this year is 30.6%, and for next year it's pegged at 27.7%. This is a cash-rich company, since the total cash position on its balance sheet is $139.67 million and the total debt is $105.50 million. After you back out the debt, Himax Technologies has around $34 million of cash on its books. This stock also sports a current dividend yield of 3.7%.
Part of the reason for the recent slide in shares of HIMX is the company's announcement that its second-quarter revenue would be flat because of a decline in orders from one of its largest customers, Samsung Electronics. Himax Technologies said its second-quarter revenue would show only modest growth of $194.6 million, compared with analysts' expectations of $223.2 million.
That weak guidance has prompted some Wall Street research firms to get very cautious on shares of HIMX here. Chardan Capital Markets downgraded the stock a few weeks ago to sell with a price target of $6 per share. Chardan said it does not expect Google (GOOG) Glass to give Himax a sales boost this year and that the Google Glass launch is more of a 2015 event for Himax.
Despite that caution from Chardan, Chase Coleman's Tiger Global Management reported in a 13F filing yesterday that the firm has established a 1 million-share position in Himax Technologies.
The extreme selloff in shares of HIMX have likely been driven mostly by momentum traders leaving the stock. This was one of hottest trades in 2013, with shares of HIMX exploding higher from under $3 to over $15 a share. Those traders coined a ton of money in this stock, and once the momentum slowed down they don't think twice about selling and locking in profits. Now this stock has been slammed to levels that many will consider make it a value play, since it trades a cheap valuation vs. its growth rate and it even pays a dividend. Not to mention that Google Glass is just starting to ramp up its launch, so we have a clear catalyst going forward. That's why I believe that Coleman is stepping into the stock here: He sees the deep value.
Another positive development for HIMX is the fact the shorts have clearly started to cover their positions and exit their trades with fat profits. As of the most recent report, the short interest for HIMX has declined by 34.5%, or by about 2.85 million shares, to a total short position of 5.41 million shares. The current short interest as a percentage of the float for HIMX now stands at around 3.87%.
So the shorts are covering, and a very smart fund manager is buying up shares of HIMX. Hard to hate those developments if you're a bull on this stock, and if you're short, you might want to reconsider whether that's the best position to have at this time.
From a technical perspective, shares of Himax Technologies has been downtrending badly for the last two months and change, with shares plunging lower from its high of $16.08 to its recent low of $6.65 a share. During that downtrend, shares of HIMX have been consistently making lower highs and lower lows, which is bearish technical price action. That severe decline has now pushed shares of HIMX into extremely oversold territory, since its current relative strength index reading has been trending well below 30 for the last few weeks. Oversold can always get more oversold, but it's also an area where a stock can experience a powerful rebound higher from if the sellers are finally done dumping stock.
Traders should look for long-biased trades in HIMX if it manages to break out above Thursday's intraday high of $7.16 a share with strong upside volume flows. Look for volume on that move that hits near or above its three-month average action of 7.12 million shares. If that breakout materializes soon, then HIMX will set up for a powerful bounce higher off oversold levels that could take this stock back towards $9 to $9.44 a share, or even its 200-day moving average of $10.75 a share. Traders should key off two near-term support levels for HIMX at Thursday's low of $6.75 a share to near its May low of $6.65 a share.
-- Written by Roberto Pedone in Delafield, Wis.
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At the time of publication, author had no positions in stocks mentioned.
Roberto Pedone, based out of Delafield, Wis., is an independent trader who focuses on technical analysis for small- and large-cap stocks, options, futures, commodities and currencies. Roberto studied international business at the Milwaukee School of Engineering, and he spent a year overseas studying business in Lubeck, Germany. His work has appeared on financial outlets including
CNBC.com and Forbes.com. You can follow Pedone on Twitter at www.twitter.com/zerosum24 or @zerosum24.
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