Bull market, bear market, or trend-less market? Regardless of what stage of the market cycle we’re in, some folks never tire of searching for cheap stocks to buy.
And who doesn’t love a bargain?
After all, the lure of finding a stock that triples from $1 to $3 a share, or quintuples from $5 to $25, may prove irresistible.
However, are there any unique problems or subtle challenges with this strategy of hunting cheap stocks to buy? Yes. Let’s consider a few.
Hundreds of stocks trade at a “low” price on both the Nasdaq and the NYSE. So, how can you pick the winners consistently?
Here’s another problem: IBD research consistently finds that dozens, if not hundreds, of great stocks each year do not start out as penny shares. Most institutional money managers don’t touch cheap stocks. Imagine a large-cap mutual fund trying to buy a meaningful stake in a stock that has been trading a dollar a share. If it has thin trading volume, the fund manager will have an awfully tough time accumulating shares without making a big impact on the stock price.
Solid, increasing institutional buying makes up the I in CAN SLIM, IBD’s seven-factor paradigm of successful investing in growth stocks.
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Another cold, hard truth that proponents of penny stocks don’t tell you? Many low-priced shares stay low for a very long time.
So, if your hard-earned money is tied up in a 50-cent stock that fails to generate meaningful capital appreciation, you might not only be nursing a losing stock. You also face the lost opportunity of investing in a true stock market leader in Leaderboard or a member of the IBD 50, the Long-Term Leaders, or IBD Big Cap 20.
Let’s consider Zoom Video (ZM) and telemedicine pioneer Teladoc (TDOC) in 2020, after the coronavirus bear market ended. These two and many others traded at an “expensive” price when they broke out to new 52-week highs and began magnificent rallies. But the quality of their business, the supercharged growth in fundamentals, and significant buying by top-rated mutual funds affirmed that their premium share prices signaled a high level of quality.
Zoom Video, after clearing a deep cup base at 107.44 in February 2020, went on to rise nearly sixfold to its 2020 peak at 588. Today? Zoom stock is struggling as it forms a new base and tries to bottom out. Sharers lost buying support at the 50-day moving average on Aug. 11. The company announced second-quarter results on Aug. 30 after the close; since then, shares have sunk as much as 57% below their all-time high of 588.
Teladoc roared past an 86.40 proper buy point in mid-January 2020. Seven months later, the stock hit 253, up 193%. Now?
Until lately, TDOC stock is now living beneath its key 50-day moving average, a bearish sign. The 50-day moving average offers chart readers a critical technical level of medium-term price support and price resistance. So, like Zoom, Teladoc is also deep in the weeds of building a new base.
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Zoom And Teladoc Aren’t Alone
Leaderboard member Adobe (ADBE) cleared a 157.99 entry in a five-week flat base in the week ended Oct. 20, 2017. The megacap tech marked a new high of 536 in early September 2020 before cooling off. And the video editing, document management, and data analytics software giant recently staged another new breakout past a new buy point, this time at 525.54.
After its breakout ADBE stock rallied sharply, gaining more than 28% and hitting the upside profit-taking zone. Adobe has been a mainstay on the IBD Long-Term Leaders. Lately, though, the stock sold off and fell well below its 50-day and 10-week moving averages after reporting decent, but not spectacular, fiscal Q3 results.
A nice rebound is in the works now. Adobe is tracing a cup without handle for now.
Still, can you employ the CAN SLIM strategy for cheap stocks to buy as well?
5 Cheap Stocks To Watch And Buy
The IBD Stock Screener filters cheap stocks that not only trade at $10 or less per share. Some also carry many of the key fundamental, technical and fund ownership quality traits routinely seen among the greatest stock market winners.
Keep in mind that liquidity is often thin. So, you might not get trade executions at an ideal price. If fund managers dump shares all at once to lock in profits, you might incur further losses when exiting the stock.
So, check the gap between a cheap stock’s best bid and best ask prices, or the difference between what one investor is willing to pay and another is willing to sell. The smaller the gap between bid and ask prices, the less price slippage.
And don’t forget the No. 1 rule of investing: keep your losses small and under control.
Stock No. 1, screening for top IBD Composite Rating: Charles & Colvard (CTHR). The expert in lab-produced gemstones is forming a long base that could correctly be called a consolidation pattern. Shares are heating up lately. Yet for now, the proper buy point stands at 3.40, a dime above a near-term high of 3.30 set on Sept. 2.
The Morrisville, N.C., firm has rock-solid IBD ratings.
The Composite Rating shines fairly well at 93 on a scale of 1 (wizened) to 99 (wizardly), but that’s come down from 96 two weeks ago. WIT also stands out with a 96 Relative Strength Rating. This means CTHR has outrun 96% of all companies in the IBD database over the past 12 months.
Mutual fund owners in Charles & Colvard stock have jumped to 34 funds as of the second quarter this year from 16 in Q3 2020. Total funds stayed at 34 in Q3.
One fundamental risk with Charles & Colvard? This company has a sketchy history of profits.
It lost money each year from 2015 to 2018, then turned a net profit of 10 cents a share in 2019. Understandably, 2020 was rough. Coronavirus shut the economy and more people stayed home. Perhaps that dampened demand for jewelry. Yet Wall Street expects the company to earn 13 cents a share in the fiscal year ending in June 2021 — down 69% vs. a year earlier — and 17 cents in FY 2022, up 31%.
Charles & Colvard earned 42 cents a share in FY 2021.
Cheap Stock No. 2
Wipro (WIT). The India-based IT consultant made a superb run-up since bottoming at 2.52 at the low of the coronavirus market crash in March 2020. Shares formed a flat base with an 8.42 proper buy point from June to July, then broke out.
The 5% buy zone went up to 8.83. WIT notched new highs throughout September, hitting as high as 9.80. Two recent down weeks proved harsh for WIT holders. However, shares rebounded handsomely in the week ended Oct. 15 and retook the 10-week moving average.
A renewed sharp drop by WIT, followed by a weak attempt to rebound back above the 10-week line, would constitute a key sell signal. That is, take profits before recent gains shrink further.
The Composite Rating has risen back to a 93 on a scale of 1 (wizened) to 99 (wizardly). WIT’s Relative Strength Rating has faded to an 87. This means Wipro has outrun 88% of all companies in the IBD database over the past 12 months.
A new base had formed with a 9.90 entry, 10 cents above the new base’s left-side peak. The base lacks symmetry, a flaw. it met the criteria for a flat base. Indeed, an 11% drop from head to toe illustrates a normal pullback after heady gains all year. But the breakout attempt earlier in October week has failed.
Another negative, chart-wise? Within the pattern, WIT shows three down weeks in heavy volume. On the plus side, in the week ended Oct. 8, Wipro did not fall much even as volume grew well above average. This suggests institutional investors eagerly accumulated shares during that sell-off, supporting the stock.
The story will consider replacing WIT with another candidate.
Finding The Right Buy Point: Quick Explainer
You might ask: Why was the former entry point in Wipro stock exactly at 8.42?
For starters, we take the highest price on the left side of a flat base — in Wipro’s case, 8.32 — then add a dime. Moving 10 cents above the base’s high gives the individual trader a sense that large fund managers are earnestly accumulating shares. Again, you want the institutions working with you, not against you.
Please read this Investor’s Corner for more insight into finding the correct buy point.
William O’Neil, founder of Investor’s Business Daily, liked to use one-eighth of a point (or roughly 12 cents) as the amount a stock had to rise above a pivot point before he considered a stock as breaking out. Of course, until decimalization transformed the stock market at the dawn of the new millennium, the major U.S. exchanges quoted share prices in one-eighths, one-sixteenths and even one-32nds of a dollar.
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Cheap Stock No. 3
Stock No. 2, screening for top IBD Composite Rating: Entravision Communications (EVC). The Santa Monica-based Spanish language media firm owns TV stations and FM and AM radio stations across nine states. The stock broke out of a 4.52 entry point in surging volume during the week ended May 21.
A new base has formed; the seven-week cup with handle generates a new buy point at 8.13. EVC stock rallied 3.5% this past week in a fresh breakout attempt.
During the week ended July 23, the stock made a sound first test of buying support at the 10-week moving average near 5.62. Since then, EVC has pulled back hard frequently, making new tests of institutional support at or near that rising 10-week line.
Buying shares as close as possible to the 10-week moving average amid a healthy rebound offers the intrepid trader a secondary buy point. Shares garnered a 6% gain in heavy turnover in the week ended Sept. 3 after rising 7.9% in the prior week.
Entravision’s IBD ratings include an 82 Composite — rising, yet still below a preferable level of 90 or higher — and a 98 for Relative Strength. Meanwhile, a B- Accumulation/Distribution Rating exceeds a neutral grade of C. The stock also pays a dividend, yielding 1.5% annually.
The company reported strong second-quarter results on Aug. 5. Earnings tripled to 9 cents a share as revenue vaulted 295% vs. a year ago to $178 million.
Entravision has now posted quarterly sales topping $100 million for the third consecutive quarter.
Wall Street sees a profitable future for Entravision, with earnings expected to climb to 38 cents a share this year vs. a net loss of a nickel per share in 2020.
Analysts also see earnings rising another 26% to 48 cents in 2022.
Premium IBD Ratings Galore
Stock No. 4, screening for top Composite Rating: Richardson Electronics (RELL). The stock has cleared a new cup pattern with a 9.09 correct buy point for the second time in roughly a month of trading. In recent weeks, RELL zoomed well past the 5% buy zone.
In other words, do not chase the stock beyond 9.54.
Shares have vaulted in recent weeks. So, this past week’s pullback is hardly surprising.
The LaFox, Ill., company focuses on radio frequency and microwave components for generators, display monitors and other products. Richardson serves the power grid, microwave tube, power conversion, diagnostic imaging markets.
Richardson’s IBD ratings include an 84 Composite and a 96 for Relative Strength. The stock also hosts a solid A+ rating for Accumulation/Distribution on a scale of A (heavy net buying by institutions over the past 13 weeks) to E (heavy net selling).
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Chip Leader Stumbles — Again
Stock No. 5, screening for Fastest Growing Earnings Per Share: United Microelectronics (UMC). The Taiwan-based integrated circuit maker has risen nearly fourfold after a July 2020 breakout around 3. A new base offered an early entry point at 9.92, 10 cents above the high in the week ended June 4.
On July 29, UMC stock broke out with an 8% gain and rallied into the 5% buy zone, which goes up to 10.42 from the 9.92 buy point. Despite a two-week pullback, UMC bullishly held above the key 10-week moving average. United Microelectronics jammed in the week ended Aug. 27, rallying nearly 9% to get well extended past the 9.92 breakout point. The stock rose another 10.7% ahead the next week in active weekly volume.
Notice how lately, however, the stock is now trading below the top of a long consolidation pattern. Shares also have slipped below the rising 10-week moving average again. A strong move off the 10-week line would offer a bullish sign that demand for shares by mutual funds, banks, hedge funds, pension funds and the like remains robust.
But at this stage, UMC appears to be building a new base, much like Wipro.
Watch to see if the stock continues to hold support at the 200-day moving average on a daily chart, or the 40-week line on a weekly chart.
United’s earnings per share have grown 50%, 350%, 225%, 167%, 400% and 100% vs. year-ago levels in the past six quarters on sales increases of 32%, 30%, 28%, 15%, 19% and 21%. The Composite Rating (95) is solid, but the Relative Strength Rating (77) is weakening.
Keep in mind that these ratings are best used for selecting stocks to buy, not for timing any entries or exits.
UMC holds a best-possible A grade for the SMR Rating, which measures sales, margins and return on equity.
A Strong Second Quarter
United Micro reported robust second-quarter results on July 28, doubling earnings to 17 cents a share. According to Yahoo Finance, one analyst saw UMC notching a net profit of 13 cents per share while another saw 15 cents vs. 9 cents a year ago. Sales grew 21% to $1.82 billion. This increase also marked a second quarter in a row of accelerating growth. The top line rose 15% in Q4 2020 and accelerated 19% in Q1 this year.
Third-quarter results came out on Oct. 27. UMC posted a 100% EPS increase to 26 cents as sales accelerated 30% to $2.01 billion.
What Does An Excellent Cup With Handle Look Like? Learn Right Here
New Emerging Leaders In Transport, Oil, Trucking
Among cheap stocks to buy in the transport sector, dry goods shipping firm Safe Bulkers (SB) and flatbed truck and logistics expert Daseke (DSKE) are acting strong lately. The pair makes the IBD Screener for companies with high Composite Ratings and trading under $10 a share.
Daseke has reversed after rallying out of a new cup without handle atop a longer consolidation. A strong move past 10.20 serves as a legitimate buy point. An 85 Composite and 91 RS Rating are still decent, but DSKE has dropped 8% below the new entry; this triggers a key defensive sell rule.
Among oil and gas plays to watch: Centennial Resources (CDEV) (73 Composite, 99 Relative Strength). Trading around 7 a share, the stock is fleshing out the right side of a cup pattern. Initially, the buy point was 7.62, 10 cents above the left-side high.
Plus, a handle has also formed, supplying a 7.67 alternate entry point. The stock tried to clear the buy point this past week. Expect third-quarter results on Nov. 3.
Safe Bulkers (88 Composite, 98 RS) crafted a new, relatively deep cup pattern. The new buy point stands at 4.56 — a dime above the base’s left-side peak. A handle also formed with a 4.35 entry. On Sept. 10, a breakout past 4.35 fizzled. But SB surged the next session, soaring nearly 17% in huge turnover. Yet since then, shares have moved in whipsawing fashion, coming back into the 5% buy zone.
Safe Bulkers’ industry group compatriot, Star Bulk Carriers (SBLK), got some airplay in the Sept. 7 edition of IBD Live, as well as on Friday’s show, Sept. 24. The stock has dove beneath its 50-day line and is forming a new base.
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(this story/news/article has not been edited by PostX News staff and is published from a syndicated feed)