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.
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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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, 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.
The company announced second-quarter results on Aug. 30 after the close; shares have sunk near the bottom of its deep consolidation.
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 still 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 26% and hitting the upside profit-taking zone. Adobe has been a mainstay on the IBD Long-Term Leaders.
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.
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: 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 with an 8.42 proper buy point.
In late July, WIT cleared this correct entry.
Buy With Rules
The 5% buy zone goes up to 8.83. WIT notched new highs this past week, hitting 9.80. So, it’s jumped out of the ideal buy range. Wipro has now gained 16% from the 8.42 breakout point.
The Composite Rating shines at 96 on a scale of 1 (wizened) to 99 (wizardly). WIT also stands out with a 94 Relative Strength Rating. This means Wipro has outrun 94% of all companies in the IBD database over the past 12 months.
Unless WIT offers a secondary buy point in the coming weeks, it will get replaced by another stock making IBD’s Stock Screener.
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.
Back in late July, the stock made a sound first test of buying support at the 10-week moving average near 5.62. In the past week, EVC pulled back hard and eyed another test of institutional support near that 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 a 79 Composite — decent yet below a preferable level of 90 or higher; 98 Relative Strength; and a solid B+ rating 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.
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.
Want To Find The Best Cheap Stocks On Your Own? Please Check Out IBD Stock Screener
Stock No. 3, screening for Fastest Growing Earnings Per Share: Global Cord Blood (CO). The China-based company stores umbilical cord blood for families. That blood could go toward future health treatments.
Global Cord shows a decent 87 EPS Rating. Earnings dropped in fiscal 2016 (ended in March that year), but have risen each year since then — from 19 cents a share in FY 2016 to 64 cents in FY 2021.
Earnings per share rose four of the past five quarters, and growth ranged from 13% to 45%. In the fourth quarter of 2020, profits fell 12% to 15 cents a share.
Sales growth has revved up over the past two quarters, going from a 7% drop in Q4 2020 to gains of 9% in Q1 this year and 23% in Q2.
The stock unfortunately gave back all its fast gains from a late-April breakout past a 5.08 entry point in a base-on-base pattern. Right now, a new base is brewing.
Notice on a weekly chart how the small cap ($587 million market cap, 121.6 million shares outstanding) is finding support at its rising 40-week moving average.
Yet for now, CO is not at a true buy point.
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Stock No. 4, screening for top Composite Rating: Loma Negra (LOMA). The Argentine cement, concrete, aggregate and lime supplier posted a 500% jump in first-quarter earnings vs. a year earlier to 24 cents a share. However, the second quarter saw Loma Negra post a net loss of 11 cents a share. Sales grew just 8%.
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.
Loma is currently struggling in a new test of the 10-week moving average while trading above the 6.79 entry point.
A strong rally off the 10-week line, currently near 7.56, would offer a secondary entry point. But don’t chase the stock. Refrain from buying shares if the stock rallies more than 10% above its 10-week moving average.
Loma’s Composite Rating has fallen to a less savory 61 rating. So, Loma certainly no longer ranks highly within the IBD Stock Screener. The 77 Relative Strength Rating has fallen, a no-no. Loma now just outperforms 77% of all companies in the IBD database over the past 12 months.
Continued weak action will result in a new company taking LOMA’s place.
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Chip Leader Stumbles, Then Rights Itself
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. And the stock rose another 10.7% ahead the next week in active weekly volume.
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 (98) and Relative Strength Rating (96). Always remember, 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.
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Among other cheap stocks to buy, these two made either the “Accelerating Sales” or “Top Relative Strength Rating” segment of IBD Stock Screener: Covid-19 vaccine developer Dynavax Technologies (DVAX) and Wall Street firm JMP Group (JMP).
Both stocks move sharply week to week, yet are respecting a key technical support level, the 10-week moving average.
Dynavax retreated fast after a big breakout past a cup with handle and a 10.45 entry point. Then DVAX soared more than 40% in the week ended Aug. 27. At this time, best not to chase the stock.
Dynavax has jumped into the No. 1 spot within the IBD 50 this month. Leaderboard offers a detailed analysis of the chart action and the company’s fundamentals.
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.
JMP shares now trade extended above the 5% buy zone from the handle buy point of 6.45. Yet the stock still trades below its 52-week peak of 8.99.
Emerging Leaders In Transport, Payments Tech, Trucking
Among cheap stocks to buy in the transport sector, dry goods shipping firm Safe Bulkers (SB), point-of-sale platform GreenSky (GSKY) and flatbed truck and logistics expert Daseke (DSKE) are acting strong lately. The trio also makes the IBD Screener for companies with high Composite Ratings and trading under $10 a share.
Are these three additional names worthy cheap stocks to buy?
Safe Bulkers is crafting the right side of 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 Friday, a breakout past 4.35 fizzled.
Safe Bulkers’ industry group compatriot, Star Bulk Carriers (SBLK), got some airplay in the Sept. 7 edition of IBD Live.
GreenSky is exiting the buy zone after floating past a 7.50 proper buy point in a four-month consolidation pattern. But GSKY is now trying to clear resistance near 8.30 after trading tightly. In fact, a 3-weeks-tight pattern formed, offering a follow-on entry at 8.43. IBD founder and longtime chairman William O’Neil discovered this rare chart pattern.
Daseke, for a while, topped the 5% buy zone after rolling past a 9.10 entry in its own consolidation. But shares struggled this past week and now trade below the breakout point.
Please follow Chung on Twitter: @saitochung and @IBD_DChung
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