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. It hit a new multiyear low of 70.29 in recent days.
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 88% below their all-time high of 588.
Zoom fell 3.9% in steep volume after reporting a 4% dip in fiscal third-quarter earnings per share on Nov. 21. Sales rose 5% to $1.1 billion, extending its streak of slowing top-line growth to seven quarters in a row. To find excellent new winners, seek companies whose growth rate is accelerating, not decelerating.
So, can you employ the CAN SLIM strategy for cheap stocks to buy as well?
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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: Extended, Yet Still Worth Watching
LSI Industries (LYTS) continues to soar. In the week ended Nov. 4 alone, shares in the maker of outdoor and indoor lighting products surged 24.7% to a 52-week high. Volume jumped sharply above average.
The pullback on Friday? Not light as a feather but still normal looking given its solid run-up since October.
LYTS sports an excellent 98 IBD Composite Rating and a Relative Strength score of 98, 1 point below the best possible.
Several weeks ago, shares also fell modestly over a few sessions after a rapid ascent over the prior 13 sessions in which LYTS catapulted 45%. But the advance has resumed bullishly.
Notice how in almost every one of its up days over the past three weeks, volume rushed above the stock’s 50-day average. The market’s message? Institutions have been grabbing shares with conviction. As of the end of Q3, as many as 101 mutual funds owned a piece of LYTS, according to MarketSmith data.
Amid this strong run, the stock cleared a new double bottom with an 8.49 proper buy point. You can locate the buy point by looking for a middle peak in between the two sell-offs, then add 10 cents.
In between LYTS’ first low of 6.97 and second low of 6.55, the stock briefly rebounded. On Oct. 11, shares got to as high as 8.39 before sinking again.
At this point, the stock is way too far extended past the 5% buy zone from the 8.49 breakout point. So, keep watching it for a potential new base to form, or a follow-on entry point to emerge.
LSI replaced Arko (ARKO), which had entered the IBD Stock Screener several weeks back with a superb IBD Composite Rating.
Arko shares last week broke out of a flat base with a proper buy point of 10.58, then reversed in ugly fashion after the Federal Reserve raised short-term interest rates by three quarters of 1 point for the fourth straight meeting. ARKO rose to as high as 10.79 before falling 1.7% to 10.15 at the close on Nov. 2. Since then, the sell-off has worsened, and the stock triggered a key loss-cutting sell rule, which is to keep the maximum loss in every stock at 7% to 8% or less.
Back to LSI Industries: The stock has now eclipsed its multiyear peak of 11.22 set in late January 2021.
On Nov. 2, the Cincinnati, Ohio, company reported a 92% surge in earnings to 25 cents a share, on top of a 63% climb in earnings in the year-ago quarter. Sales rose 19% to $127.1 million, the smallest year-over-year increase in six quarters. LSI’s fiscal year ends in June. The Street sees fiscal 2023 profit rising 30% to 83 cents a share and up another 6% in FY 2024.
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Cheap Stock No. 2
Enerplus (ERF), a small cap with a $4.5 billion market value, leads IBD’s Canadian oil and gas exploration industry group. On Monday, ERF got hammered along with its peers. WTI light sweet crude oil futures and natural gas both fell sharply.
ERF shares tanked 11% this past week. While volume also fell below average, the sharp price drop justifies locking in gains or cutting gains. The big undercut of the 10-week moving average constitutes a critical sell signal.
ERF will likely get replaced soon.
Its Composite Rating has dropped again to 93. The 92 Relative Strength Rating has also sunk yet still looks good on a scale of 1 (worst) to 99 (best). This assesses ERF’s motion over the past 12 months. However, these ratings should be used only to judge stocks as possible buy candidates, not for when to sell stocks.
The stock had gotten extended past a 16.90 proper buy point in a cup with handle, one of the most bullish patterns created by top growth stocks at the start of their strong price runs.
Due to the sell-off, shares are no longer within the 5% buy zone from the 16.90 entry. As this past week’s action shows, it’s usually best to wait for a stock to find its footing and rally again before considering a buy.
Enerplus reported third-quarter results on Nov. 3. The next day saw the stock gapped up 6% in heavy volume and made new highs. For now, the uptrend is holding up.
In late September, Enerplus finished a 4-1/2-month cup with handle. The handle’s highest price, 16.48, plus 10 cents, offered an actionable entry point once shares cross above 16.58. A breakout attempt on Oct. 7 struggled immediately.
But a new handle formed from Oct. 10 to 19, marking a final shakeout of uncommitted shareholders. And this handle on the cup pattern set up a new entry point of 16.90. For a while, ERF had gotten extended. That is, shares topped the 5% buy range — up to 17.74 — from this new handle entry.
Buying a quality growth stocks within 5% of its proper entry minimizes the probability that a natural pullback in the stock will knock you out of the position with a quick loss.
Enerplus’ Q3 earnings soared 156% vs. a year earlier to 87 cents a share on a 98% sales jump to $720.5 million.
ERF has also made further price progress after it retook the 50-day line, another bullish sign.
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. But EVC is rebounding sharply lately. On Nov. 10, shares shot 8.7% higher and closed above its 200-day moving average for the first time in nine months.
A new cup with handle is in the works as well, producing a 5.74 buy point for EVC. Shares are attempting a new breakout.
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.
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Stock No. 3: Payments Industry Play
Paya (PAYA) (85 Composite Rating, 97 Relative Strength Rating) has witnessed heavy buying in recent weeks while pulling back in generally lighter turnover — a bullish sign. The stock replaced Sensus Healthcare (SRTS), which plunged 45% in massive turnover on Nov. 4 following third-quarter results.
Paya had a rough time during the second half of 2021 to May of this year. It fell from a summer peak of 11.99 to a December low of 5.83, then easily undercut that low in early 2022.
Yet shares bottomed after reaching 4.51 in May, then rebounded to 7.68 by August. The stock formed a new base over the next 11 weeks, then muscled past a 7.78 buy point. On Nov. 11, shares exited the 5% buy zone (between 7.78 and 8.17). But a sharp pullback two weeks ago briefly reeled Paya shares back into the buy zone.
The two-week slide from a near-term high of 9.26 was definitely steep — to the tune of 18%. So at this point, you’d like to see the stock strengthen and rise amid increasing volume before considering a buy.
Earlier in November, the provider of payment systems for merchants posted a 125% jump in third-quarter profit to 9 cents a share, its best result in at least two years. Sales rose 13% to $71.4 million, matching its Q2 increase. Analysts surveyed by FactSet see full-year earnings up 16% this year to 37 cents a share and up another 16% in 2023 to 43 cents.
One more point to make: Paya has briefly posted a 20% profit from its 7.78 buy point. Generally, you want to take profits in most stocks when the profit hits 20% to 25%. The reason? After such an outstanding short-term gain, growth stocks often correct sharply in price and surrender most or all of that hard-earned advance.
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Cheap Stocks To Buy: 4th Idea
Brazil financial app operator Inter & Co. (INTR), featured for the first time here nearly a month ago, has failed to recover after sliding beneath its 50-day moving average. In its place? SurgePays (SURG) of Bartlett, Tenn.
SurgePays’ Composite Rating edged up to a 75 on a scale of 1 to 99 vs. 72 in recent weeks. This feature tends to focus on stocks with a Composite score of 90 or higher. SURG’s Composite has rebounded but is still not fantastic.
Last week, SURG rallied out of a cup base that shows a 7.40 proper buy point for now. That bullish move made the stock actionable. But on Monday, shares are swinging below the new entry.
A sharp 99 Relative Strength Rating counters a dismal 39 EPS Rating. That EPS score dropped after SurgePays posted a net loss of 12 cents a share in the third quarter, unchanged vs. a year earlier.
Until recently, the cup pattern features no handle. But after sinking for four of the past six sessions, SURG has now latched a new handle, representing a shakeout of uncommitted shareholders, on the cup. Thus, a new entry point of 6.43, or a dime above the Nov. 7 intraday high, has emerged.
Notice in recent days that SurgePays has rallied sharply and climbed back above its 50-day moving average after spending roughly seven weeks beneath this quintessential technical level of support and resistance. That’s bullish.
The company provides a software platform that mainly processes third-party activations for prepaid cell phones. The platform also handles prepaid cell phone account balance top-ups, gift card activations and wireless SIM activations. The company also seeks to act as an “innovative supply-chain marketplace for convenience store, bodega and tienda owners” by offering top selling products at a deeper wholesale discount than traditional distribution chains.
SurgePays does not make money yet. However, sales rocketed 146% to $28 million vs. a year earlier in the second quarter of this year. That marks a fourth quarter in a row of top-line growth acceleration.
What does this mean? The pace of growth in sales is quickening from quarter to quarter. Hence, SURG made the “Accelerating Sales” section of the IBD Screener for top stocks trading under 10 a share.
In the second quarter of 2021, SurgePays’ sales wilted 22% to $11.4 million. However, since then, quarterly sales have lifted 14%, 25%, 92% and most recently 146%. This track record marks four straight quarters of year-over-year sales acceleration.
The weekly chart also highlights a strong run-up since SURG bottomed near 1.8 in January. The stock has managed to carve out a nice series of higher highs and higher lows.
Yet keep in mind that with the market in bear-market correction mode, all new buys carry extraordinarily high risk of failure.
Wall Street thinks SurgePays can earn 40 cents a share in 2023; that could stop a five-year streak of net losses.
SurgePays, a true microcap stock, has 12.4 million shares outstanding, a float of 7.4 million, and a market value of $90 million. The long-term debt to equity ratio of 28% in 2021 is reasonable.
Investor’s Corner: What Is Relative Strength?
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Replacing Genfit (GNFT) recently: DecisionPoint Systems (DPSI). The Amex-listed enterprise software firm joined the list on a recent weekly gain of 5% in accelerating weekly turnover.
DecisionPoint sports a 97 Composite Rating, rising nicely from 85 three weeks ago. Even though the EPS Rating has rocketed to a best possible 99, the sell-off had pounded DecisionPoint’s Relative Strength Rating to a middling 59. Now, the RS has rebounded to 98, very solid.
A strong move past 8, especially in robust or rising turnover, would justify a new buy. DecisionPoint has done just that, padding its gains on Monday with an 8.7% spurt higher. DPSI shares finished 8.4% higher for the week. No wonder its relative strength line catapulted into new high ground.
However, risk is elevated, given that shares tumbled after a strong Q3 report (earnings up 275% to 15 cents a share vs. the prior year, sales up 41% to $25.7 million). The big swings seen in DPSI since September point to higher risk of losing money.
So, if shares continue to make sharp drops and fail to break out, DPSI will get the chop.
The week of Thanksgiving showed bullish action. DPSI advanced more than 19% in active turnover and rebounded back above the 10-week moving average. A 9.5% lift on Nov. 22 came in heavy volume, quadruple its 50-day average of 27,600 shares per day.
In the fourth quarter of 2021, earnings shrank 50% to 4 cents a share on a 10% contraction in the top line to $16.5 million. This could set up an easy year-over-year comparison for upcoming Q4 results in 2022.
The month of May showed some really wild action. At one point, following first-quarter results, DecisionPoint hit a new high of 12.98, then reversed badly.
Clearly, some folks were selling into strength. Shares then dropped hard, undercutting the 4 price level, but bottomed out in July.
The company’s mobile platform helps clients integrate their data and services efficiently. Earnings dove to 5 cents a share in 2021. However, analysts think the bottom line will rebound 380% this year to 24 cents a share. Meanwhile, DPSI’s enterprise software industry group has backtracked to 106th among 197 industry groups in terms of six-month relative price performance. Not bad, but there’s room for improvement. Check the industry group ranking at IBD Data Tables.
IBD research has found that up to 50% of a brilliant growth stock’s run can be attributed to the strength of its industry group and the strength of its broad industry sector.
Please check out the IBD stock research tables at IBD Data Tables to see the current rankings of 33 broad sectors.
Want To Find The Best Cheap Stocks On Your Own? Please Check Out IBD Stock Screener
These Cheap Stocks Also Deserve A Good Look
It may also behoove traders to keep a close eye on Amex-listed Flexible Solutions International (FSI).
FSI makes the list of stocks priced under 10 and holding top EPS Ratings. FSI rocketed 95% in three straight days of gains from Oct. 3 to 5. Since then, the pullback has been mild and in lighter turnover, a plus. FSI has traveled on the north side of its long-term 200-day moving average. And this past week, FSI broke out of its new base, surpassing a 3.45 entry.
Rrefrigerant decontamination and reclamation firm Hudson Technologies (HDSN) and Brazilian steelmaker Gerdau (GGB) may also deserve a look. Hudson ranks among the stocks trading under 10 a share and owning top Composite ratings.
Hudson has formed a pair of neighbor cup bases since June. The latest cup shows an eight-day handle through Tuesday, with volume becoming whisper-quiet. While 11.26 still poses as a legitimate buy point, an investor could also wait until Hudson surpasses 11.44 before considering a new buy.
The Golden Rule
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.
Please follow Chung on Twitter: @saitochung and @IBD_DChung
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