RSI & PEG Investing Strategy

Overview

STRATEGY DESCRIPTION

The PEG ratio is a refinement of the Price to Earnings (P/E) ratio that incorporates the company’s expected earnings growth rate. It offers a more comprehensive picture, allowing us to identify undervalued stocks that are growing earnings at a reasonable price. Typically, a PEG ratio of less than one suggests a stock might be undervalued given its earnings growth.

The RSI, on the other hand, is a technical indicator that measures the speed and change of price movements. It oscillates between zero and 100, and is used to identify overbought (an RSI above 70) and oversold (an RSI below 30) conditions.

Bringing these two together, our strategy aims to identify stocks that are undervalued (PEG less than 1) and oversold (RSI less than 30), thereby pinpointing value stocks that have been excessively sold off and are potentially due for a price bounce-back.

This strategy works well in volatile markets with significant price fluctuations, as these environments often lead to stocks being oversold despite solid fundamentals. Our objective is to identify these value buys before the market corrects itself and their prices rebound.

WHAT YOU WILL LEARN

The primary objective is to pinpoint undervalued stocks with a high potential for growth. By using RSI, investors can time their entry points during periods of undue pessimism, and the PEG ensures that the stock is a value buy in the context of its growth prospects.

While it’s challenging to quote a universal success rate—since individual stock performance and market conditions can vary—many investors have found success by marrying these two metrics. Historically, combining fundamental and technical analysis has often led to more consistent and reliable results than relying on either method alone.

LEARNING OUTCOMES

The Strategy covers all of the following areas and is a great way to learn how to combine both technical and fundamental analysis to achieve a potent strategy

Screening: Begin by screening for stocks with a PEG ratio less than 1, signaling they might be undervalued relative to their growth potential.
Technical Analysis: From this list, further narrow down stocks with an RSI below 30. This combination identifies stocks that are fundamentally strong but temporarily beaten down.
Diversify: Don’t put all your eggs in one basket. Choose a diverse set of stocks to mitigate risks associated with any one sector or company.
Timing: The RSI can help in timing the market. Consider buying when the RSI crosses above 30, indicating the beginning of upward momentum.