The Magic Number: S&P 500 at 1,100

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(Written by Rebecca Lipman. List compiled by Eben Esterhuizen, CFA. Profitibility data soured from Fidelity, all other data sourced from Finviz)

Market strategist Jeff Saut suspects the S&P 500's lucky number is 1,100. That number arose from data showing that recent market volatility has continually brought the index around 1,100 only to see it rebound. This finding raises the question, have we found the bottom of the current market downturn?

Saut has pointed out 1,100 serves the S&P 500 "as a key technical level if the market were indeed in the midst of a bottoming process." (via Market Folly)

Whenever the number comes close, investors seem to feel market concerns are fully priced in, or perhaps too undervalued, and start to take their chances.

Since the market remains unpredictably volatile, hedge funds have been generally hesitant to recommit their cash into the market until the bottom of the market has been hit and recorded. Thus if 1,100 proves to be an acceptable bottom and rebounding level, it could have big impacts on hedge funds’ decisions to rejoin the market. The S&P 500 index currently rests at 1,160.

When hedge funds feel it is time to heavily invest it could mean an explosive rebound. That's because when bullish investments happen on a significant scale market prices start to rise, signaling a rally few want to miss out on. More continue to invest and prices rise even higher. It's one reason why recessions often see gradual declines and sudden spikes.

"It's clear any future rally could be a fierce one as cash comes rushing back from the sidelines," says Saut.

Of course, market prices theoretically assume all future valuations are priced in - including the effects of a probable recession - and any technical level for a rebound is in the eye of the beholder. Saut himself says that if the S&P drops below 1,100, the next downside level he would target would be 1020-1030.

So, which companies might see some hedge fund buying if the market bottom is confirmed?

For ideas, we started with a universe of about 150 stocks with RSI(14) readings below 30, which usually signals oversold conditions.

From this universe, we collected profitability data, and identified the companies that have reported stronger-than-average profit margins over the trailing twelve months (TTM).

Considering the profitability track record of these companies, do you think hedge funds will chase these oversold and profitable stocks if the market bottoms?

List sorted alphabetically.

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1. BBVA Banco Frances S.A. (BFR): Provides financial services to corporations, medium and small companies, and individuals in the Republic of Argentina. RSI(14) at 26.93. TTM gross margin at 81.44% vs. industry average at 71.5%. TTM operating margin at 54.69% vs. industry average at 39.45%. TTM pretax margin at 33.13% vs. industry average at 22.77%.

2. CARBO Ceramics Inc. (CRR): CARBO Ceramics Inc. manufactures and supplies ceramic proppants primarily used in the hydraulic fracturing of natural gas and oil wells in the United States and internationally. RSI(14) at 29.77. TTM gross margin at 45.66% vs. industry average at 34.93%. TTM operating margin at 29.24% vs. industry average at 17.99%. TTM pretax margin at 28.58% vs. industry average at 16.51%.

3. Helmerich & Payne Inc. (HP): Engages in the contract drilling of oil and gas wells in the United States and internationally. RSI(14) at 29.22. TTM gross margin at 43.18% vs. industry average at 34.93%. TTM operating margin at 26.29% vs. industry average at 17.99%. TTM pretax margin at 26.21% vs. industry average at 16.51%.

4. LAN Airlines S.A. (LFL): Provides passenger and cargo air transportation services. RSI(14) at 28.6. TTM gross margin at 37.17% vs. industry average at 23.65%. TTM operating margin at 11.71% vs. industry average at 8.64%. TTM pretax margin at 8.8% vs. industry average at 6.1%.

5. Netflix, Inc. (NFLX): Provides subscription based Internet services for TV shows and movies in the United States and internationally. RSI(14) at 17.37. TTM gross margin at 55.92% vs. industry average at 36.84%. TTM operating margin at 13.66% vs. industry average at 9.03%. TTM pretax margin at 13.14% vs. industry average at 8.31%.

6. Patterson-UTI Energy Inc. (PTEN): Provides onshore contract drilling services to oil and natural gas operators. RSI(14) at 27.67. TTM gross margin at 40.67% vs. industry average at 34.93%. TTM operating margin at 19.27% vs. industry average at 17.99%. TTM pretax margin at 18.54% vs. industry average at 16.51%.

7. Tenaris SA (TS): Engages in the manufacture and sale of steel pipe products. RSI(14) at 29.95. TTM gross margin at 41.26% vs. industry average at 34.93%. TTM operating margin at 18.54% vs. industry average at 17.99%. TTM pretax margin at 19.76% vs. industry average at 16.51%.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Stocks

Referenced Stocks: BFR , CRR , HP , LFL , NFLX , PTEN , TS

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