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 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 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.
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 73% 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 still 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 75% below its all-time peak of 308, is struggling hard to bottom out and build a new base.
So, 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.
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 is cooling off after rebounding nicely off the 10-week moving average.
ICL fell right to this technical level amid a selling fury in growth stocks earlier in December.
The Israel-based firm sports a superlative Composite Rating of 99. The 98 Relative Strength Rating means ICL has outperformed 98% of all companies in the IBD database over the past 12 months. Fantastic.
The stock has a market value of $13.3 billion and 1.28 billion shares outstanding. The float stands at 679 million. ICL produces fertilizers, bromine and phosphorous compounds for farmers and engineered materials.
Notice on a weekly chart how in the week ended Dec. 3, ICL fell 4% and ended the week 12 cents above the 10-week line, which rose to 8.53.
Buying a rebound off the 10-week moving average following a solid breakout from a good base offers a secondary entry. Ideally, buy no more than 5% to 10% above the 10-week line at the time of the rebound. Thus, ICL is extended from any buy range.
The market outlook at IBD changed for the worse on Dec. 3, but a new follow-through day on Dec. 15 signaled a better environment for going long in stocks. Please read the Big Picture column each day to get IBD’s current outlook for stocks.
When the Israeli firm jumped out of a gigantic bottoming base near 4 in November 2020, ICL ran up fast, then bounced off its 10-week line twice before settling into a four-month shallow cup with handle from June to October of this year.
The buy point in this pattern? Add 10 cents to highest price within the handle, or 7.50, to get a breakout at 7.60.
Earnings per share grew 25%, 120%, 83% and 240% vs. year-ago levels in the past four quarters. The huge gains come in part on easy year-over-year comps. That is, the bottom line fell 60%, 58%, 50% and 50% in the prior four quarters. Yet the top line is humming; revenue jumped 19% to $1.32 billion in the fourth quarter of 2020, then scaled up another 14%, 34% and 49% vs. year-ago levels in the past three quarters.
Wall Street sees ICL’s earnings soaring 175% last year to 55 cents a share and another 27% to 70 cents in 2022. The consensus 2022 EPS estimate has strengthened, a good sign. ICL also pays a dividend, so the stock currently yields 2.3% annually.
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 are now losing support at the 200-day line.
In November, the stock appeared to be forming a handle since making a short-term high of 3.48 on Nov. 8; adding 10 cents to the highest price within the handle, or 3.48, generates a new entry point at 3.58. However, the 19% drop within this recent pullback is normally too deep for a good handle.
Cheap Stock No. 2
Stock No. 2, screening for top IBD Composite Rating: Enerplus (ERF). The small cap with a $3 billion market value has emerged as a new leader within IBD’s Canadian oil and gas exploration industry group.
Enerplus replaces 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 completed an eight-week win streak.
ERF has 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 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
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.
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.
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 84 Composite Rating, but it’s fallen significantly. The Relative Strength Rating shines at a top-drawer 99. The 3-month RS Comes in at a respectable 86.
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.
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 diving back into the 5% buy zone.
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 a 85 Composite Rating and a 98 for Relative Strength. The stock sports a decent B- rating for Accumulation/Distribution on a scale of A (heavy net buying by institutions over the past 13 weeks) to E (heavy net selling).
Cheap Stocks to Buy, No. 5: Chip Play Stumbles, Rebounds Again
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.
Today? UMC has carved a new pattern — a shallow cup — while respecting its 40-week moving average. This technical level behaves in similar form to the 200-day moving average on a daily chart. Shares are rising again after posting strong third-quarter numbers (EPS doubled to 26 cents, sales up 30% to $2.01 billion).
UMC recently completed a narrow five-day handle. And on Dec. 1, shares soared more than 8% to stage a breakout past a new entry at 12.04 — a dime above the handle’s intraday high of 11.94. Amid steep drops in the major equity averages, United Microelectronics had been hanging tough. But big drops in recent days have punched the stock below this latest entry.
The 5% buy zone from the 12.04 buy point goes up to 12.64. However, the stock retreated. It fell 5.8% in the first week of January in accelerating turnover.
UMC is in need of holding the 10-week line to keep its chances of a new rally alive.
Such price-and-volume behavior is ideal for a breakout in CAN SLIM stocks. That is, you want to see evidence that the elephants in the stock market jungle — mutual funds, banks, university endowments, pension plans and the like — are grabbing shares with both fists.
Notice how UMC stock is still trading near the top of a long consolidation pattern. Shares had slipped below the rising 10-week moving average for six weeks in a row. So, a strong move back above the 10-week line in November hinted at bullish demand for shares by mutual funds, banks, hedge funds, pension funds and the like.
United’s earnings per share have grown 50%, 350%, 225%, 167%, 400%, 100% and 100% vs. year-ago levels in the past seven quarters on sales increases of 32%, 30%, 28%, 15%, 19%, 21% and 30%. The Composite Rating (99) remains fiercely bullish. A Relative Strength Rating of 88? Solid.
Keep in mind that 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.
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. The pair makes the IBD Screener for companies with either a high Composite Rating or a robust Relative Strength score and trading under $10 a share.
Crescent Point (99 Composite, 99 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 (82 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. But another breakout attempt did not bear fruit.
On Nov. 26, CDEV 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 CDEV can retake its 50-day moving average with force. So far, so good. And for sure, Centennial is working on a new base.
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 (79 Composite, 92 RS) has 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. However, DSKE dropped 8% below the new entry; this triggers a key defensive sell rule. On the bullish side, the stock is still fighting to keep abreast of its 10-week moving average.
A few more cheap stocks to buy or consider: Lantronix (LTRX) and Radiant Logistics (RLGT). They make the IBD cheap stocks screener in terms of “Top Earnings Per Share Rating.”
Lantronix, sold off on news that it priced an offering of 4.7 million shares at 7.50 apiece. LTRX has 29.7 million shares outstanding. The stock pierced the key 50-day moving average in November, but has bullishly rebounded back above it. So for now, IBD will not consider replacing LTRX with another candidate from the IBD Stock Screener. Indeed, LTRX appears to be trying to bottom out and form a new base.
Radiant is struggling after falling back below the 8.30 entry in a six-month cup without handle. The pattern had this flaw; not much time was spent above the 10-week moving average as the stock built the base. On the plus side, Radiant showed a normal-sized 27% correction within the base from head to toe.
It appears RLGT will need more time and buying demand to set up a potential new breakout. Notice how the stock is fighting to boost back above the flattening 200-day moving average. IBD will consider replacing Radiant with another company from the screen.
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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