Finding Carnage in Small-Caps

10/01/2015 9:00 am EST

Focus: STOCKS

Matt McCall

Founder and President, Penn Financial Group

When market-wide selling occurs during a correction it often times creates opportunities in stocks that do not have a fundamental reason behind the selling, so Matt McCall, of Penn Financial Group, spotlights three stocks that may have fallen as a result of emotional selling decisions.

The Russell 2000 index, which tracks the small-cap stocks, is now down 16% from its all-time high set in June of this year. A big reason for the correction has been the overweighting of the biotech sector. The biotech stocks helped propel the index to new heights and they have also taken away a large portion of the yearly gains.

This week the index traded at its lowest level of 2015 and if the trend continues it could retest the 52-week low of 1040 and put the index on the verge of a new bear market. There are a large number of stocks in the index that are already at 52-week lows and that are greatly underperforming the broad index. Some of the stocks are down on legitimate reasons, while others are getting taken out to the woodshed as a byproduct of panic selling.

When market-wide selling occurs during a correction it often times will punish the best performing stocks as investors are inclined to sell winners before taking a loss. This philosophy will create opportunities in stocks that do not have a fundamental reason behind the selling, rather it is a victim of emotional decisions.

Investors that are willing to take a longer-term view can use the unwarranted selling of specific stocks as a chance to buy at a discount. There are a few stocks in the Russell 2000 that have fallen victim to this phenomenon that could be near levels that are considered buying opportunities.

Addus Homecare Corporation (ADUS) provides home and community-based services to the elderly and disabled. The services can be healthcare related or simply personal care assistance. The stock has fallen over 10% in one week from an all-time high as investors sold anything healthcare related. Technically, the stock has support at the $30 area, where a buy opportunity could be considered.

Another healthcare stock, BioTelemetry (BEAT), has also been hit with selling based solely on the fact that the sector is struggling. The stock has fallen 30% in just over two weeks from a multi-year high. The one bright light for the stock is that it remains above its 200-day moving average ($10.86) and price support at the $11 area. This would be an aggressive investment, however it comes with high reward potential.

Callidus Software (CALD) provides enterprise software to a variety of industries and was breaking out to a new decade high before the selling began. Now the stock is down 12% from the high and holding above all major moving averages and price support at the $16 area.

Buying this week could be considered risky if this correction turns into a bear market, but nearly all signs point to a garden variety correction that was more than overdue.

Matt McCall, Founder and President, Penn Financial Group

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