India's worst-performing stock in July may rebound if history is any guide

Shares of pharma firm Dr Reddy's Labs have rallied about 15% after losing steam

Dr. Reddy’s Laboratories Ltd., one of India’s largest drug firms, is the nation’s worst-performing stock in July on disappointing earnings and a US probe. But one technical indicator suggests the shares could be due a snap back.

The stock’s relative strength index has dropped to a level indicating the shares are oversold. When that’s happened over the past five years, shares of the Hyderabad-based company have rallied about 15% on average in the 20 subsequent trading sessions, according to data compiled by Bloomberg.

Dr. Reddy’s earnings trailed estimates and the company has disclosed that it’s responding to a subpoena from the U.S. Securities & Exchange Commission. Jefferies India Pvt. analyst Abhishek Sharma, who rates the stock a buy, said in a note the SEC probe “could be material” if it leads to an adverse finding, but shouldn’t affect “our thesis on the company.”

The drug-maker’s shares became oversold 12 times over the past five years based on the relative strength index. In 55% of the cases they traded higher over the next 20 days, according to the data compiled by Bloomberg. In the instances where they were lower, the average loss was just over 6%.