Editor’s Note: The “Profit Windows” methodology Jim describes in today’s article — identifying fundamentally undervalued companies after a Wall Street overreaction — is the same framework behind every position in his Personal Finance portfolio. His latest briefing shows where that screen is pointing now. See the current portfolio →

Last week, I discussed “How to Trade a Stock Market Profit Window.” The concept is easy enough to understand. Identify a stock that is fundamentally undervalued, then take a position in it shortly before a triggering event sends its share price moving up the charts.

Of course, that is much easier said than done, so I have developed a process for doing that. I’m not trying to outsmart the collective mind of Wall Street analysts. I’m not that smart, and I don’t have the resources to compete against them.

However, I can use their collective mindset to my advantage. They tend to concentrate their money in whatever is hot at the moment, bidding up share prices to unsustainably high levels.

I am looking for companies that have fallen out of favor and are trading at unsustainably low levels. In some cases, they are businesses that have experienced a one-time event that temporarily distorts their operating metrics but is not indicative of their long-term potential. In other cases, exogenous events outside their control have destabilized their operating environment, such as the war in Iran.

On most days, my Profit Windows stock screener will show me a few dozen companies that meet all my requirements for valuation. Specifically, I am evaluating relative valuations for forward earnings, sales, and cash flow growth.

After that, I apply several technical indicators to zero in on those that also appear to be oversold from a short-term perspective. When a destabilizing event occurs, it is not unusual for the algorithms on Wall Street to overreact by extrapolating current circumstances too far into the future.

By the time I have applied all my fundamental and technical metrics to the thousands of stocks that trade on U.S. exchanges, perhaps only a dozen or two remain. That’s when the fun begins.

Flat Footed

A recent example of a “profit window” trade is one that I executed last week. Last month, big box retailer Dick’s Sporting Goods (NYSE: DKS) fell 30 percent in one day after the company released its fiscal 2026 Q2 results (circled area in the chart below).

To be sure, those numbers were not good. Due to underperformance by its Foot Locker division, Dick’s reported diluted earnings per share (EPS) of $3.50 during the second quarter compared to $4.71 in the same period last year. In addition, the company reduced its guidance for pro-forma comparable sales and operating income for the remainder of this year, also attributable to Foot Locker.

That’s the bad news. The good news is that the problem is contained to a single product area. The rest of the business is performing well, so the immediate challenge is to resolve the Foot Locker issue expeditiously so it does not carry over into next year.

To hear the company’s Executive Chairman, Ed Stack, tell it, the elements that contributed to Foot Locker’s poor quarter were more tactical in nature than strategic: “As the quarter progressed, conditions across portions of the athletic footwear and apparel marketplace became increasingly promotional, and we took action to remain competitively priced to protect and grow our leadership position.”

Now, the company is prioritizing profit margins over sales. That should help improve its EPS, but will most likely reduce top-line sales. For that reason, the guidance for Foot Locker’s pro-forma comparable sales for this year was reduced “to a range of negative 2.0% to 0.0%.”

Sole Survivor

Usually, I avoid “fallen angels” such as DKS. It can take several quarters to fix the type of problem it has with its Foot Locker business. And sometimes, the problem never gets solved.

In this case, I believe the problem is fixable. There are several ways the company could do that. One way is to sell Foot Locker to a competitor or spin it off as a separately traded entity if a buyer cannot be found.

So far, the company has not indicated that it is contemplating doing that. However, that must be something being considered by its board of directors, some of whom also work for private equity firms that might be interested in taking Foot Locker private, leaving the Dick’s Sporting Goods division as the sole survivor.

By the time Dick’s management team solves the Foot Locker problem, it will be too late to trade it. By then, its share price should be in rally mode and the profit window will have slammed shut.

In that respect, making this type of trade is a wager that Dick’s current share price overstates the long-term magnitude of the Foot Locker issue. If I turn out to be right about that, then this trade could be another profit window winner!

The process I’ve been describing in today’s column — and in Personal Finance for over a decade — hasn’t changed. I’m not trying to outsmart Wall Street. I’m looking for places where the collective mindset has overreacted: companies trading at unsustainably low levels after events that don’t reflect their long-term worth. I evaluate forward earnings, sales, and cash flow relative to peers, then layer in technical indicators to find the names the algorithms have pushed furthest. The screen found NVIDIA in 2022 — I closed that position in January 2025 up 975%. The same four-part test is pointing at a specific group of companies today, for a different reason. Read the briefing on what’s passing the screen →