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 equities 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 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.
Solid, increasing institutional buying makes up the I in CAN SLIM, IBD’s seven-factor paradigm of successful investing in growth stocks.
Which Fast-Growing Large Caps Show Strong IBD Ratings? Check Here
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 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, IBD Sector Leaders, 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. So, how about the year 2021? Zoom stock is struggling as it forms a new base and tries to bottom out.
Shares lost buying support at the 50-day moving average on Aug. 11. The company announced second-quarter results on Aug. 30 after the close, and announced Q3 results in mid-November; since then, shares have sunk as much as 76% 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?
TDOC stock is living well beneath its key 50-day moving average, a bearish sign, as well as its long-term 200-day line. Both moving averages are falling precipitously. The 50-day moving average offers chart readers a critical technical level of medium-term price support and price resistance.
Plus, Teladoc, now 77% below its all-time peak of 308, is struggling hard to bottom out and build a new base. The Relative Strength Rating has withered to a 6 on a scale of 1 to 99.
So, can you employ the CAN SLIM strategy for cheap stocks to buy as well?
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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.
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.
Stock No. 1, screening for top IBD Composite Rating: ICL Group (ICL). A member of IBD’s agricultural chemicals group, the midcap growth stock and specialty minerals firm has made a strong run since the fourth quarter of 2020. Now, ICL shares are recovering after tanking two weeks ago, falling 11%.
ICL also slashed through the 10-week moving average in the heaviest weekly turnover for a down week in nearly two years.
Such negative action provoked a key IBD defense sell rule. So, this stock will get replaced. Candidates include Golden Ocean Group (GOGL), which surged 11% this past week in accelerating turnover. The member of IBD’s ship transport group is forming a deep cup pattern.
ICL replaced Charles & Colvard (CTHR), an expert in lab-produced gemstones. The stock had been forming a long base that could correctly be called a consolidation pattern. Until recently, the proper buy point stood at 3.40, a dime above a near-term high of 3.30 set on Sept. 2. But shares have plunged through the 200-day line.
Cheap Stock No. 2
Stock No. 2, screening for top IBD Composite Rating: Enerplus (ERF). The small cap with a $2.9 billion market value has emerged as a new leader within IBD’s Canadian oil and gas exploration industry group.
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.
Shares in Enerplus formed a 13-week cup base with a 7.64 proper buy point from July to September, then broke out beautifully in the week ended Oct. 1. That week saw shares soar 11.6% to new 52-week highs.
The 5% buy zone from that 7.64 entry went up to 8.02. The Calgary-based company then went on an eight-week win streak.
ERF in December staged a bullish test of support at ERF’s 10-week moving average and is now extended. A strong bounce off this technical level often offers a secondary entry point. On Dec. 6, ERF acted bullishly, rising nearly 4% and hopping off its 10-week line at 9.43.
The current action marks a third rebound attempt off the 10-week line.
Again, the first two rallies off the 10-week moving average, following a strong breakout, offer ideal follow-on entry points.
The Composite Rating in Enerplus offers a divine 98 score on a scale of 1 (wizened) to 99 (wizardly). The Relative Strength Rating is top notch, at 99.
Finding The Right Buy Point: Quick Explainer
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
Cheap Stock No. 3
Stock No. 3, screening for top IBD Composite Rating: Huttig Building Products (HBP). The St. Louis-based company has rallied magnificently since testing support at the long-term 40-week moving average near 5 in early October. Shares catapulted out of its neighbor cup base at 7.55, then sprinted to new highs.
However, recent weeks have seen HBP and building-related stocks get whacked as higher interest rates may increase concern about the pace of future demand in the residential construction market. HBP is undercutting the 10-week moving average.
A new base is in the works. Yet further declines could spark a key sell rule.
Huttig replaced Wipro (WIT); the India-based IT services firm continues to struggle near its 10-week moving average.
At the December peak of 11.35, HBP has rallied as much as 50%. It would be sensible to lock in some gains.
The distributor of millwork, building materials and wood products for homebuilding markets could also be held, so long as it doesn’t crash beneath its 10-week line in gigantic volume. Support at the shorter-term 21-day exponential moving average lately is bullish.
Huttig holds a solid 87 Composite Rating, but it’s fallen significantly. The Relative Strength Rating shines at a top-drawer 99. The 3-month RS Rating has rebounded from an unsavory 49 to 78. Not bad.
The company’s earnings per share has been super-strong for four quarters in a row, totaling $1.53 a share.
Sales jumped 2%, 6%, 29% and 15% vs. year-ago levels over the same time frame.
Huttig’s retail and wholesale building products group has retreated outside the top 20 among 197 groups tracked by IBD for six-month relative price performance.
Keep an eye on the daily rankings at IBD Data Tables.
Want To Find The Best Cheap Stocks On Your Own? Please Check Out IBD Stock Screener
Cheap Stocks To Buy: No. 4
Screening for top Composite Rating: Richardson Electronics (RELL). In September, 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. Then RELL zoomed well past the 5% buy zone.
In other words, do not chase the stock beyond 9.54.
RELL surged 11% in the first week of 2022 in exceptional volume following a solid November-quarter report. Earnings vaulted 500% to 30 cents a share; sales jumped 27% to $54 million, likely an all-time quarterly record.
A new entry point from a 10-week consolidation pattern at 12.97 emerged. RELL also got bullish support at its rising 10-week moving average. The new breakout spawned an excellent new buy opportunity, but shares are now trading below this latest entry point.
So it is not a buy at this time.
Richardson Electronics is also testing holders at the 10-week moving average, which has been rising nicely since September.
In this kind of market environment, it makes total sense to wait for the heavy selling to subside before considering a new buy.
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 83 Composite Rating and a 97 for Relative Strength. The stock sports a decent C+ 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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Cheap Stocks to Buy, No. 5: A New Entrant
Screening for Fastest Growing Earnings Per Share: Evolution Petroleum (EPM). The Houston-based developer of oil and gas in Texas and Oklahoma has just finished the sixth week of building the right side of its own deep cup pattern.
For now, the buy point is far away at 6.84. But watch for more upside progress and the potential for a handle to form on the current cup base; at this stage, 6.26 could emerge as a lower entry.
Evolution replaces United Microelectronics (UMC), a longtime feature of this column. United Micro crashed this past week, down 14% in the heaviest volume in at leat more than five years. The stock also took out its 200-day moving average on a daily chart, another key sell signal.
The Composite Rating in EPM is outstanding at 98. A Relative Strength Rating of 96 also rocks.
Evolution holds a neutral C grade for the SMR Rating, which measures sales, margins and return on equity. However, after a long dry spell of growth, the top line jumped 309% vs. year-ago levels in the second quarter of 2021 and surged 237% in Q3 2021.
The micro cap, with a market value of less than $200 million, also posted solid earnings in four of the past five quarters.
Wall Street sees Evolution’s earnings surging to 72 cents a share in the fiscal year ending in June this year, up 1,100% from 6 cents in FY 2021.
What Does An Excellent Cup With Handle Look Like? Learn Right Here
New Emerging Leaders In Oil, Trucking, Banking, Logistics
Among cheap stocks to buy, Crescent Point Energy (CPG), Centennial Resources (CDEV) and flatbed truck and logistics expert Daseke (DSKE) may be worth watching.
Crescent Point (99 Composite, 98 Relative Strength) is acting like a leader now after surpassing a 4.96 entry in a four-month cup without handle. Shares then moved sideways, refusing to give much ground after an impressive four-week, 51% rally. A new cup-like consolidation formed, presenting a new buy point at 5.58. CPG surged past this entry as well.
Centennial Resources (86 Composite, 99 Relative Strength) broke out in late October, but its rally stalled. The stock fleshed out the right side of a cup pattern. Initially, the buy point stood at 7.62, 10 cents above the left-side high. In October, the stock poked above this key entry. Then a new handle formed, supplying a 7.67 alternate entry point.
CDEV pulled away from this new breakout point in October, but the breakout attempt did not bear fruit.
On Nov. 26, the stock and its oil and gas peers fell hard on a sharp drop of as much as 13% in crude oil futures amid news of the emergence of the omicron variant of Covid-19. Watch to see if Centennial can retake its 50-day moving average with force. So far, so good.
And for sure, the small cap is working on a new base, an 11-week cup with handle that offers a 7.87 entry. This past week, Centennial enjoyed a 10% weekly gain in strong turnover. It surpassed this new buy point and is well within the 5% buy zone.
In early November, Centennial posted third-quarter results that highlighted a 126% jump in free cash flow vs. the prior quarter; earnings of 12 cents per share, a 5% rise in daily crude oil production vs. Q2; total capital expenditures of $78.9 million; and a $50 million reduction in borrowings under its revolving credit facility to $205 million outstanding. Centennial also agreed to sell 6,200 net leasehold acres and related assets to affiliates of Henry Resources and Pickering Energy Partners for $101 million in cash.
Daseke (90 Composite, 98 RS) stumbled after rallying out of a new cup without handle atop a longer consolidation. A strong move past 10.20 previously served as a legitimate buy point. DSKE dropped 8% below the new entry; this triggers a key defensive sell rule. But shares have since rebounded in a big way.
The stock fought to keep abreast of its 10-week moving average. A 13% high-volume gain in the week ended Jan. 28 helped set up a new buy point: 10.51 in an eight-week double-bottom base.
To find this entry, add 10 cents to the middle peak in between the two sell-offs making the double bottom. In this case, the Jan. 4 high of 10.41 marks the middle peak. Add a dime to get 10.51.
At 11.50, DSKE has now gotten extended past the 5% buy zone, which went up to 11.04.
Never forget the golden rule 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.
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