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 50 cents to $2.50, may prove irresistible.
But do you know the unique problems and subtle challenges of hunting cheap stocks to buy? Let’s consider a few.
Hundreds of equities trade at a “low” price on both the Nasdaq and the NYSE. So, how can you pick the winners consistently?
Another challenge? 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 trades at 30 cents 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.
IBD research also finds that dozens, if not hundreds, of great stocks each year do not start out as penny shares.
Solid, expanding institutional buying among fundamentally strong companies with double-, triple- and even quadruple digit share prices makes up the I in CAN SLIM, IBD’s seven-factor paradigm of successful investing in growth stocks.
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Cheap Stocks To Buy: First, Understand These Pitfalls
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 dollar 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 such as those that enter IBD Leaderboard or a member of the IBD 50, IBD Sector Leaders, the Long-Term Leaders, or IBD Big Cap 20.
Let’s consider Zoom Video (ZM) in 2020, after the coronavirus bear market ended.
Zoom and many other institutional-quality firms 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 sales and earnings, 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 six-fold to its 2020 peak at 588. So, how about now? Zoom stock is struggling as it forms a new base and tries to bottom out after falling to a 52-week low of 79.03.
Shares lost buying support at the 50-day moving average on Aug. 11. The company announced second-quarter results on Aug. 30, and quarterly results since then have shown a dramatic growth slowdown. Shares are rebounding lately and trying to bottom out, but not before sinking as much as 86% below their all-time high of 588.
So, can you employ the CAN SLIM strategy for cheap stocks to buy as well?
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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.
Check Out IBD Live! Trade Top-Quality Stocks With CAN SLIM Experts And Investing Pros
And don’t forget the No. 1 rule of investing: keep your losses small and under control.
Cheap Stocks To Buy: Idea No. 1
Sensus Healthcare (SRTS) formed a four-month base with a 12.06 buy point. Shares vaulted more than 20% in heavy trading on Aug. 5 to cap a 29% weekly gain after issuing excellent quarterly results.
A 5.5% drop on Aug. 8 took back less than a fifth of the prior week’s huge move up. Since then, shares had traded in tight fashion until sharp losses on Aug. 15. Since then, SRTS has been drifting lower.
As seen on a MarketSmith daily chart, Sensus has fallen below the short-term 10-day moving average. Then shares undercut the 21-day exponential moving average. At this point, failure to reclaim the 21-day line would generate concern about the health of this new breakout. Thus, Thursday’s 3.1% pop in accelerating turnover is encouraging.
The 21-day exponential moving average allows users to get a sense of a stock’s performance immediately after the breakout.
At this point, a key sell rule would be not to let a paper gain of 10% or more turn into a loss. Taking at least some gains helps preserve a positive trading psychology.
That said, it is common to see good stocks break out, rally quickly, then pull back near the breakout point. Some short-term traders or others who bought at low prices are cashing in. But a supreme growth stock will brush off these declines, refuse to trigger the golden rule of investing, and resume their sharp price climbs.
A member of IBD’s medical systems industry group, SRTS shows a top-notch Composite Rating of 99. The Relative Strength Rating matches that fine score. The company’s radiation therapy technology treats non-melanoma skin cancer and keloids.
Sensus’ earnings hit 21 cents a share, marking a huge improvement from a net loss of 2 cents in the year-ago period. Sales soared 124% to $12.1 million, a quarterly record. Sensus exited the June quarter with $34 million in cash and cash equivalents. Sales soared 237% in the first quarter. That helped boost earnings to 97 cents a share vs. a net loss of 7 cents a year earlier.
The micro-cap stock has seen its market value expand to as high as $247 million. Prior to the breakout, SRTS has shown multiple up days in heavy volume in recent weeks. That’s another positive change, given that SRTS made a test of buying support at the 200-day moving average on July 5.
Sensus did not pause to form a five-day or longer handle, so the breakout pushed SRTS out of a cup without a handle.
This means 12.06, or the left-side high of 11.96 plus a dime, served as the actionable buy point. Strong breakaway gaps, however, provide an alternative entry point. Using an intraday chart is key here. Please read more about why breakaway gaps can produce excellent rallies in this Investor’s Corner.
If the stock holds up well after the initial move in the first 5 or 15 minutes of trading, then a trader could watch to see if shares lift above the highest price within the 5- or 15-minute intraday bar. In Sensus’ case, the first 15-minute bar showed a high of 12.60.
At this point, a pullback to the 10-week moving average may offer a secondary buy point. But this could still take quite a while.
Investor’s Corner: What Is Relative Strength?
Cheap Stocks To Watch And Buy: No. 2
Genfit (GNFT) hails from IBD’s biotech industry group, which has recently advanced to as high as No. 3 among 197 industry groups for six-month relative price performance. (You can check the daily change in rankings at IBD Data Tables.)
The stock is working on the right side of a deep new cup base. The high of this eight-month pattern: 6.38. Despite recent upside progress, GNFT is still trading 26% below that price, the stock is not at a buy point now.
Yet, as the daily chart shows, the stock has repeatedly seen resistance at 4 and at 4.50. So, a strong move past 4, or even 4.67 — a dime above the March 25 near-term high — in heavy volume would indicate the institutions are loading up on shares. For the individual trader, that’s the right time to ride the big boys and big girls’ coattails on Wall Street.
GNFT hosts a good 94 Composite Rating and a 95 Relative Strength score.
Shares finished the week ended Aug. 5 up 7.9% in accelerating weekly turnover to 4.64. So for the aggressive investor, GNFT was actionable at the time. Last week, shares briefly eclipsed the 5 price level, but stumbled to lose 7.5% for the week. Shares on Monday outperformed both the S&P 500 and Nasdaq in a big way, rising 2.1%.
One could also wait to see if GNFT can get up to 5; at that price, it would be trading much closer to the left-side peak of its current base. At the point, an investor could expect a pullback that shakes out more uncommitted holders. Such action etches a handle on the deep cup pattern that has already been forming.
Read more about how an excellent cup with handle can produce magnificent profits in a timely manner. Keep in mind there are well-built cup-with-handle patterns and terrible ones.
The French company develops diagnostic products to treat liver-related diseases.
Revenue soared to $93.4 million in the second half of 2021 vs. $2.3 million a year earlier. That big jump in the top line helped Genfit post earnings of $1.32 a share in the final six months of last year.
Genfit reports results every six months, not three. The company is slated to report first-half results on Sept. 28.
Further gains past the stock’s 50- and 200-day moving averages would underscore rising institutional demand.
In its most recent up days, volume jumped well above Genfit’s 50-day average. That’s helped boost the stock’s Accumulation/Distribution Rating to an A.
The Relative Strength Rating has jumped from the high 70s in recent weeks to a promising 95. This improvement has helped boost Genfit’s Composite score to a 95.
Screening for top IBD Composite Rating: Replacing SunCoke Energy (SXC) in late June was multimodal transportation firm Radiant Logistics (RLGT). The Amex-listed company is carving out a long cup-with-handle pattern. It holds a sweet 96 Composite Rating.
Price action in the third-party logistics expert had been tightening, a good sign.
Radiant operates a network of more than 100 locations globally.
A handle has latched on to the long base and offers a correct buy point at 7.87. On Thursday, RLGT surged almost 7% in accelerating volume and hit that entry. Thus, amid the confirmed market uptrend, Radiant is actionable. Since then, however, RLGT shares have traded in whipsaw fashion. Last month, shares ran into eager sellers near 8. So that price level still poses as an area of potential overhead supply.
The stock is struggling to rebound after a sharp undercut of the 50-day moving average last week. So, unless a strong rebound takes place soon, RLGT will likely replaced.
The 5% buy zone for RLGT went up to 8.26. Radiant trades on average 125,000 shares a day.
Notice, too, how in recent months, RLGT has posted several weekly gains in heavy volume. That points to increasing ownership among mutual funds, hedge funds, insurers, pension plans and the like. However, the 73 Relative Strength Rating has worsened.
The B Accumulation/Distribution Rating, continues to dip but remains positive. This rating indicates that over the past 13 weeks, demand appears to sharply outweighing supply among fund managers.
The 91 Composite Rating reflects rosy fundamental, technical and mutual fund ownership metrics for the Bellevue, Wash., specialist in domestic and international freight forwarding services. Earnings have grown nicely for six straight quarters. In the past three quarters, the bottom line jumped 62%, 41% and 83% vs. year-ago levels.
Big sales increases helped drive that profit growth.
The top line rose 63%, 52% and 95% vs. year-ago levels in the past three quarters. In the March-ended fiscal third quarter, Radiant achieved $460.9 million in sales, likely a record amount for the company. MarketSmith expects the fiscal Q4 results to arrive on or around Sept. 9.
Back in June, the stock’s relative strength (RS) line vaulted into new high ground, another plus.
A rising RS line means RLGT is sharply outperforming the S&P 500.
Wall Street thinks profits will continue to blossom, rising 6% in FY 2022 (ended in June) to 71 cents a share and up another 30% to 92 cents in FY 2023.
A small cap at $338 million, Radiant has 49.5 million shares outstanding and a float of 37.6 million. The stock trades on average 170,000 shares a day.
SunCoke got the boot as it cut through its 10-week and 40-week moving averages in recent months. The Composite Rating of 83 is slowly improving; a 66 RS Rating is now meh.
Cheap Stock No. 4
Stock No. 4, screening for top IBD Composite Rating: Enerplus (ERF). The small cap with a $3.7 billion market value has emerged as a leader within IBD’s Canadian oil and gas exploration industry group. But it’s also joined a decent group of oil explorers that are correctly sharply in price.
Enerplus hosts an 92 Composite Rating, which is down 4 points vs. last week. The 97 Relative Strength Rating still looks very smart on a scale of 1 (worst) to 99 (best). But this assesses ERF’s motion over the past 12 months. Its 3-month RS Rating had moved up nicely to 91, according to MarketSmith, but has back-slid to a less than favorable 75.
ERF has also made further price progress after it retook the 50-day line, a good sign.
Currently, Enerplus appears to be sculpting a three-month cup with handle. The handle’s highest price, 16.48, plus 10 cents, offers an actionable entry point once shares cross above 16.58.
A new base formed through mid-May. For a while, the base carried the elements of a double bottom. Adding 10 cents to the middle peak in between the two sell-offs, or 14.07, and you get a potential entry at 14.17. Shares broke out and at one point marked exceeded a 31% profit in just three weeks or less since the breakout. Targeting that type of gain to the upside was the best call.
But ERF has surrendered all of its gains since past the 14.17 original buy point, forcing new buyers to respect the round-trip sell rule. And in recent weeks, shares undercut the low of its prior base.
This resets the base count, a plus. However, the big slide is good enough reason to consider jettisoning ERF and replacing it with a new candidate if shares do not rebound soon. For now, ERF still is far from taking out a proper buy point. But shares now stand 16% off their all-time high, an encouraging sign.
In early May, Enerplus reported robust first-quarter results. Earnings soared 233% vs. a year earlier to 60 cents a share. Sales grew 78% to $306.3 million. The strong growth in the top line certainly helped the Canadian firm post an astounding after-tax margin of 47.6%.
On Aug. 4, the company reported a new batch of superb numbers. Second-quarter earnings galloped 233% higher to 70 cents a share on a 238% leap in sales to $580.5 million. On Monday, ERF outperformed the market with a 1.4% gain. Yet shares remain locked below the key 50-day moving average.
Enerplus replaced Entravision Communications (EVC), which fell sharply three weeks in a row in November and eventually took out its 10-week moving average in accelerating volume. That ushered a defensive IBD sell signal.
What Is The ‘Correct Buy Point’?
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.
Investor’s Corner: Seven Mental Tips To Help You Beat The Stock Market
Stock Idea No. 5
AXT (AXTI) has replaced Amplify Energy (AMPY) as the fifth name for cheap stocks to buy and watch. An RS Rating of 94 has fallen from a 97 lately, yet remains attractive. However, the 87 Composite score slightly disappoints. It stoops below an ideal level of 95 or higher.
AXT shares, down 4% on the day after the three-day Labor Day holiday weekend, is testing support at the key 50-day moving average.
The member of IBD’s semiconductor equipment industry group is clearly outperforming the major indexes lately. Shares rocketed 31% higher during the week ended July 29 in the biggest weekly turnover this year.
As the weekly chart shows, AXT could run into potential upside resistance near 10 to 12.
That certainly happened in June last year. A gentle pullback following enormous gains in the past month may lead to a promising new buy point.
Watch for a deep cup with handle to possibly emerge.
Last week, the Fremont, Calif., expert in gallium arsenide and germanium and indium phosphide substrates reported a 30% jump in Q2 profit to 13 cents a share. On a per-share basis, that marked the biggest profit in at least eight quarters. That Q2 jump also came off a 900% leap in earnings in the year-ago period. So, a 30% increase amid difficult year-over-year comps is truly amazing.
Sales grew at a slower rate than in recent quarters, up 17% to $39.5 million. You’d prefer to see the top line growth accelerate or stay steady, rather than decelerate. That said, on average AXT’s sales have grown an impressive 30% vs. year-ago levels over the past four quarters.
AXT shows a market capitalization of $360 million, 43 million shares outstanding and a float of 39.1 million.
Want To Find The Best Cheap Stocks On Your Own? Please Check Out IBD Stock Screener
The Golden Rule
A few more stocks that make IBD’s screen of low-priced cheap stocks with very good Composite scores that may deserve a close look: Nordic American Tanker (NAT), which is now rumbling past a 2.98 proper buy point in a four-month cup with handle; Aveo Pharmaceuticals (AVEO), Streamline Health (STRM) (1.85 entry in its own cup with handle) and Altus Power (AMPS).
Aveo has gotten extended after eclipsing a 6.29 buy point in an 11-week cup without handle. Its 50-day moving average has risen sharply for months and is trying to catch up with the stock itself. Altus is trying to strengthen again after rising past a very deep cup’s pivot point of 11.45.
Finally, never forget the No. 1 maxim of IBD-style investing. If you buy at a proper buy point and expectations get broken, cutting losses short to protect your hard-earned capital allows you to invest in a more promising growth company in the near term.
This means no matter at what price in which you purchased shares, accept no larger than a loss of 7%-8% on those shares. You can quickly recover from such a deficit. But a 40% or 50% loss requires that you make a 67% to 100% gain on the next trade to get back to break-even.
Even among cheap stocks that you look to buy.
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