These three stocks are oversold and primed for major gains

U.S. equities experienced a slight Friday pullback, yet major indices concluded August higher, with an 87% probability of a September Federal Reserve rate cut. CNBC Pro highlighted several stocks at technical extremes: Keurig Dr Pepper (KDP) is notably oversold, down 17% weekly after its $18B JDE Peet's acquisition led to analyst downgrades over leverage concerns, despite a 29% implied upside. Charter Communications (CHTR) and Hormel Foods (HRL) are also oversold, with CHTR showing a 54% potential rally. Conversely, Deckers Outdoor (DECK) and Wynn Resorts (WYNN) are overbought, having surged 10% and 11% respectively this week, both receiving positive analyst reiterations and upgrades citing strong performance and growth prospects.

Analysis

Despite a minor market pullback on Friday, U.S. indices finished August on a positive note, supported by market expectations of a Federal Reserve rate cut in September, with the CME FedWatch Tool indicating an 87% probability. The primary focus is on individual stocks at technical extremes. Keurig Dr Pepper (KDP) has become significantly oversold with a 14-day RSI of 29, following a 17% weekly decline triggered by its planned $18 billion acquisition of JDE Peet's. While the deal promises $400 million in synergies and a future split of its business units, it drew a downgrade from HSBC over concerns of excessive leverage, projecting a net debt/EBITDA ratio of 6-8x. In contrast, LSEG data shows an average analyst price target implying 29% upside. Similarly, Charter Communications (CHTR) is oversold after a 4% weekly drop, presenting a conflict between its discounted valuation, which prompted a Bernstein upgrade, and persistent secular challenges; its average price target suggests a potential 54% rally. Hormel Foods (HRL) also joins the oversold list after a 13% plunge on disappointing earnings. Conversely, Deckers Outdoor (DECK) and Wynn Resorts (WYNN) are flagged as overbought with RSIs of 71 and 77, respectively. DECK rallied nearly 10% on strong growth prospects for its HOKA and UGG brands, leading UBS to reiterate a buy rating with a target implying 33% upside, though this is notably more bullish than the 8% upside suggested by consensus. WYNN's 11% weekly gain was driven by a UBS upgrade citing its strategic expansion, particularly its exclusive gaming resort in the UAE.

Key Decisions for Investors

• Consider the oversold status of Keurig Dr Pepper (KDP) and Charter Communications (CHTR) as a potential contrarian entry point, but carefully weigh the significant analyst-implied upside against the fundamental risks of high M&A leverage for KDP and secular headwinds for CHTR.
• For the overbought momentum stocks, Deckers (DECK) and Wynn (WYNN), investors should acknowledge the strong positive catalysts but be wary of the high RSI readings, which signal an elevated risk of a short-term pullback; note the discrepancy between bullish individual analyst targets and more modest consensus estimates for DECK.
• Given the high probability of a September rate cut, monitor how a more accommodative monetary policy could influence both undervalued names and high-growth stocks, as this may provide a broad tailwind for equities and affect the technical setups of these specific companies.