Screening for over sold stocks offering value.

Having updated the Compound Income Scores (CIS) for subscribers this morning I thought I would share an idea coming out of the latest run. One aspect of them is an over bought / over sold or OB/OS indicator that I like to use to help time entries into good quality growing yield stocks at reasonable prices. I base this indicator on a combination of short term and longer term price momentum indicators and I tend to use it in conjunction with the the share price chart and a traditional 14 day RSI OB/ OS indicator. The short term indicator I use is the one month relative performance on the basis that this has been found to be mean reverting i.e. strong rises or falls have a tendency to reverse the next month, although each individual situation will be different depending on the circumstances. Meanwhile the longer term indicator is based on the distance that the price is above or below the 200 day moving average (roughly one year). Again I have found when this get extended in either direction there is a tendency for this to revert towards the average over time.

Any way this is probably best illustrated by a current example of a small stock Zytronic (ZYT) which makes large robust touch screens for specialist applications and currently comes out at the top of the list. On this OB/OS measure the stock comes in with a Score of 16 suggesting it is in the bottom 20% of stocks (most oversold) in my 600+ universe.

Now they had interim results last month which seemed fine to me, although may have disappointed some as the turnover was flat. This was to some extent expected and consistent ‎with their strategy of moving away from the business' traditional glass displays and growing its technologically advanced touch product business. This included a dividend increase of 10% which is in line with full year forecasts and I note that the earnings have been upgraded since the results giving me some confidence that the full year dividend of 13.2p will be achieved. This is also covered twice by forecast earnings and backed up by strong cash flow and nearly £10m of cash on the balance sheet versus the market cap of around £56m.

On current upgraded forecasts with the shares at their depressed 360p price they trade on a fairish looking 14x or so, although adjusted for the cash this could be 12x or less and they come with a yield of 3.7% and the shares are currently cum the interim of 3.45p until they go XD on 7th July, which is worth about 1%.

So I would say they look over sold and offer reasonably good value if you adjust for the cash and the chart shows they are towards the bottom end of their recent range. I do however note the gap on the chart earlier in the year at around 307p which do have a tendency of being filled in the medium term. So if you are not inclined to buy any stock at the moment due to the BREXIT debate then it might be worth putting this one on your watch list with a price alert for less than say 310p. I note it also Scores 94 on the Stockopedia Stock Ranks.

So there you go there's a good value and good quality stock which is looking over sold and towards the bottom of its recent range. It also remains in the Compound Income Scores portfolio which I run along side the Scores. If you are unfamiliar with these then you learn  more about them and how to subscribe by following these links to the Scores and the Portfolio.