Bottom Fishing: Turning Points in Depressed Stocks
Investors pursuing bottom-fishing strategies, aiming to identify undervalued assets for future appreciation, can benefit significantly from abnormal returns calculated through Event Study Methodology (ESM). Abnormal returns, representing the difference between actual and expected returns during and after specific events, offer a quantitative measure of how an asset's price deviates, aiding investors in pinpointing when depressed stocks might start rising again.
Capturing the turning point for depressed stocks through event studies involves a nuanced analysis of abnormal returns over time. Event studies, particularly when examining cumulative abnormal returns (CAR), provide a powerful tool for investors seeking to identify when undervalued assets are poised for a rebound. By scrutinizing historical patterns of negative cumulative abnormal returns that subsequently revert due to recent positive abnormal returns, investors can gain valuable insights into the turning points for depressed stocks.
Depressed stocks often manifest in negative long-term CARs in the past - often event-induced, by e.g., earnings disappointments or adverse market conditions. This negative trend suggests that the market perceives the stock as poor value due to specific adverse events.
Turnarounds of this development, typically get initiated by key events. This is marked by a large positive abnormal return and a reversion in the negative trend of the cumulative abnormal return.
Monitoring the market for statistically significant reversion events can thus help in timing investments into depressed stocks. Investors may thus want to analyze the trends in (cumulative) abnormal returns over an extended period. By examining the historical context and identifying the events associated with positive ARs that break the historical negative pattern of decline can help to assess if the trajectory of the stock's price turns.