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.
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And who doesn’t love a bargain? After all, the lure of finding a stock that triples from $1 to $3 a share, or even from $5 to $15, may prove irresistible.
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 forming a new base and testing buying support at the 50-day moving average. It recently joined SwingTrader as a new position.
Teladoc roared past an 86.40 proper buy point in mid-January 2020. Seven months later, the stock hit 253, up 193%. Today? TDOC stock is trying to climb back above its key 50-day moving average, a critical technical level of medium-term price support and price resistance. Like Zoom, Teladoc is also deep in the weeds of building a new base.
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.
ADBE stock has rallied sharply, gaining more than 20%. Meanwhile, it appears a narrow shelf pattern formed from July 23 to Aug. 4.
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.
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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: Wipro (WIT). The India-based IT consultant has 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 that highlights an 8.42 proper buy point. Now, WIT has cleared this correct entry.
Buy With Rules
The 5% buy zone goes up to 8.83. So, WIT is jumping out of the ideal buy range.
The Composite Rating remains superlative at 96 on a scale of 1 (wizened) to 99 (wizardly). WIT also stands out with a 90 Relative Strength Rating. A 91 RS Rating means Wipro has outrun 90% of all companies in the IBD database over the past 12 months.
You might ask: Why is the entry point 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. 2
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.
Three weeks ago, the stock made a sound first test of buying support at the 10-week moving average near 5.62. This week, EVC is definitely making a sound test of institutional support near that 10-week line, which has now risen to nearly 6.
Buying shares as close as possible to the 10-week moving average amid a healthy rebound offers the intrepid trader a secondary buy point.
With four solid gains booked since last Thursday, EVC has gotten extended past the 10% buy zone after the rebound off the 10-week moving average.
Entravision’s IBD ratings are enviable: 90 Composite; 99 Relative Strength; an up/down volume ratio of 1.9; and back to a solid A for Accumulation/Distribution. The stock also pays a dividend; due to recent strong price gains, the annualized yield has dropped to 1.3%.
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.
Premium IBD Ratings Galore
Stock No. 3, screening for top Composite Rating: Loma Negra (LOMA). The Argentine cement, concrete, aggregates and lime supplier posted a 500% jump in first-quarter earnings vs. a year earlier to 24 cents a share. Sales accelerated to a 37% gain to $143 million, according to MarketSmith. The IBD relative strength line bolted to new 52-week highs recently.
Loma Negra briefly pulled back into the 5% buy zone after clearing a base-on-base pattern at 6.79. The buy zone goes up to 7.13. Therefore, after shares have claimed a fourth straight up week, they currently trade extended past that proper buy zone.
In short, don’t chase the stock. Good time to wait and watch.
Loma’s Composite Rating fell recently to an 84 on a scale of 1 to 99; the RS Rating stands at 91, meaning over the past 12 months Loma has outperformed 91% of all companies in the IBD database.
A Former Huge Winner In Apparel Retail
Stock No. 4, screening for top Relative Strength Rating: Chico’s FAS (CHS). The former leader of IBD’s retail apparel and shoes industry group is making its first test of the 10-week line after clearing a cup-without-handle base at 4.22. So far, so good.
The first and second rallies off the 10-week line — near 5.76 during the week ended July 23 — after a strong breakout pose as secondary entry points.
With Tuesday’s sharp gains, at this point CHS has hopped outside the 10% buy zone from the 5.76 secondary buy point. So it’s getting slightly extended.
Chico’s sports a top-drawer 99 RS Rating. This means its relative strength is top-notch. Put another way, CHS has outperformed 99% of all companies in the IBD database over the past 12 months.
On the fundamentals side, at least eight quarters in a row of net losses by the Fort Myers, Fla., firm weigh on the slowly increasing 73 Composite Rating. But sales rebounded 38% in the April-ended fiscal first quarter to $388 million. According to Yahoo Finance, one analyst thinks Chico’s will post a net loss of 4 cents a share in the July-ended second quarter; another analyst targets an 11-cent loss. The women’s apparel chain lost 40 cents a share in the year-ago quarter.
The consensus forecast calls for a 33% jump in the top line, however, to $407.4 million. Look for Q2 results in late August.
Chip Leader Stumbles
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 offers 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. But in recent days, UMC is retreated sharply. In Friday-afternoon trade, a 6% slide sent shares shares beneath its 21-day exponential moving average, a negative change in character following the breakout. At 10.27, UMC remains mildly above the 9.92 breakout point.
A key rule is to never let a stock that shows a double-digit percentage gain turn into a full round trip.
Goldman Sachs reportedly named United Micro to its conviction list. Citi analysts upgraded the stock to a buy rating from neutral. JPMorgan boosted its rating to overweight from neutral and sees a potential gain of 32% from current levels, Benzinga reported.
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%. Solid numbers for both Composite Rating (95) and Relative Strength (94); however, 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. 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. The company exceeded both analysts‘ views with profit of 18 cents a share, doubling the 9 cents it earned a year earlier.
The two analysts shared a consensus top-line forecast of $1.78 billion, up 18% vs. $1.51 billion in Q2 of 2020. Sales grew 21% to $1.82 billion. This increase also marked a second quarter in a row of accelerating top-line growth. Sales rose 15% in Q4 2020 and accelerated 19% in Q1 this year.
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Additional names that could justify as cheap stocks to buy? These companies deserve a close look.
Gerdau (GGB) is forming the right side of a new base. For now, a buy point of 7.37 is quite distant. The steel maker has been sticky near key moving averages such as the 21-day exponential and the 50-day simple.
The commodity and infrastructure play shows a normal 26% decline within its current cup-type structure.
Like Wipro, Gerdau qualifies for the Top Composite Rating section with a 98 score.
Wall Street shows a consensus earnings estimate of $1.31 a share this year, up 381% from the 27 cents booked in 2020.
Several weeks ago, these companies made either the „Accelerating Sales“ or „Top Relative Strength Rating“ segment of IBD Stock Screener for top-rated stocks trading under $10 a share: ProPhase Labs (PRPH), Dynavax Technologies (DVAX), Entera Bio (ENTX), JMP Group (JMP) and Eastside Distilling (EAST).
All five stocks had recently traded above a key technical support level, the 10-week moving average.
However, due to poor price action the past week by PRPH and EAST, they will get replaced by other stocks making the screen of top-performing low-priced stocks.
JMP cleared a 6.45 buy point in a four-month cup with handle. However, the handle formed near the middle of its cup pattern. You’d prefer to see the handle begin forming when a stock has climbed to within 5%, 10% or possibly 15% of its 52-week high.
Notice too how JMP still trades below the cup’s left-side peak of 7.30 and its 52-week peak of 8.99. Nonetheless, JMP stock bolted 18% higher for the week following a bullish July U.S. jobs report.
ProPhase tanked more than 22% after posting a net loss of 9 cents a share in the second quarter despite a 152% year-over-year jump in sales. Dynavax soared 28% this past week after its bullish second-quarter report. Eastside slid 14% after posting a net loss of 12 cents a share on a 7% dip in sales.
Please follow Chung on Twitter: @saitochung and @IBD_DChung
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