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.
XAnd 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.
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 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 88% 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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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.
Cheap Stocks To Buy: New Idea No. 1
Brazil financial app operator Inter & Co. (INTR), featured for the first time here several weeks ago, has failed to recover after sliding beneath its 50-day moving average. In its place? SurgePays (SURG) of Bartlett, Tenn.
The company's Composite Rating has fallen from 75 to 68 on a scale of 1 to 99. Normally, this story selects stocks with a Composite score of 90 or higher. Yet SURG is building a nifty cup base that showed a 7.40 proper buy point.
Until recently, the cup pattern features no handle. But after sinking for four of the past six sessions, SURG has now latched a handle, representing a shakeout of uncommitted shareholders, on the cup. Thus, a new entry point of 6.25, or a dime above the handle's intraday high.
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.
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 makes 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.
The stock's 97 Relative Strength Rating counters a dismal 55 EPS Rating. Wall Street thinks SurgePays can earn 91 cents a share this year, however, even after the company lost 10 cents a share in the first quarter and 12 cents in Q2.
SurgePays has 12.4 million shares outstanding, a float of 7.4 million, and a market value of $75 million. The long-term debt to equity ratio of 28% in 2021 is reasonable.
Stock No. 2: A Health Care Play
Sensus Healthcare (SRTS) formed a four-month base with a 12.06 prime buy point. Shares vaulted more than 20% in heavy trading on Aug. 5 to cap a 29% weekly gain after the company issued excellent quarterly results.
The company's radiation therapy technology treats non-melanoma skin cancer and keloids.
A 5.5% drop on Aug. 8 took back less than a fifth of the prior week's huge move up. Shares had traded in fairly tight fashion until sharp losses on Aug. 15. Since then, SRTS has swum within a range between 11.50 and 15.
As seen on a MarketSmith daily chart, Sensus fell 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.
The 21-day exponential moving average gives users a sense of a stock's performance immediately after the breakout.
Shares rebounded nicely on Sept. 30 (up 4.7%) and the next session, rising 4.8%. But a fresh pullback has also yanked the stock back under the fast-rising 50-day moving average.
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 its sharp price climb.
A member of IBD's medical systems industry group, SRTS shows a Composite Rating of 98, which is excellent. The Relative Strength Rating stays top-drawer at 99.
Sensus' second-quarter 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 in Q2, likely the biggest total in any quarter. 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. If the stock holds up well after the initial move in the first 5 to 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.
Please read more about why breakaway gaps can produce excellent rallies in this Investor's Corner.
As now seen in SRTS, a good stock that retreats to the 10-week moving average may offer a secondary buy point. However, market conditions remain severe. So new buys must generally be avoided or made with extreme caution.
Investor's Corner: What Is Relative Strength?
Cheap Stocks To Watch And Buy: No. 3
Replacing Genfit (GNFT) on Tuesday: DecisionPoint Systems (DPSI). The Amex-listed enterprise software firm blasted 13.6% higher on Tuesday in heavy volume. Amid heavy market volatility, DecisionPoint still gained 3% two weeks ago in above-average volume. This action hinted at solid institutional demand for shares. Shares are aiming to gain ground for a fourth week in a row.
Notice on a daily chart how DPSI has been holding up during sell-offs that sent shares briefly below the 50-day line.
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.
At this point, watch for the stock to test the 8 level and perhaps make one more pullback, ideally in light volume.
This shakeout may sculpt a cup with handle in DecisionPoint. 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 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.
In the fourth quarter of 2021, earnings shrank 50% to 4 cents a share on a 10% contraction in the top line. Yet in the past two quarters, DecisionPoint's profit soared 433% and 233% vs. year-ago levels to 16 cents and 10 cents a share, respectively. Sales jumped 23% and 81% over the same time frame.
DPSI shows a rising 90 Composite Rating on a scale of 1 to 99. The RS Rating of 97 is improving as well.
Stay focused on those stocks with a Relative Strength Rating of 85 or higher.
Meanwhile, DPSI's enterprise software industry group recently climbed to 77th 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.
Cheap Stock No. 4
Stock No. 4, screening for top IBD Composite Rating: Enerplus (ERF). The small cap with a $3.8 billion market value has emerged as a leader within IBD's Canadian oil and gas exploration industry group. It hosts a strong 96 Composite Rating.
The 97 Relative Strength Rating still looks great 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 has moved back up nicely to 95, according to MarketSmith.
ERF has also made further price progress after it retook the 50-day line, a good sign.
Currently, Enerplus appears to be sculpting a four-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.
ERF briefly topped that buy point, but has retreated mildly. The price action lately appears to be creating a new handle, which offers an extra buy point of 16.90.
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.
Especially in bear market conditions, taking profits frequently at the 20%-25% level locks in well-earned gains before they vanish.
Targeting that type of gain to the upside was the best call. ERF 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), after plunging in early October, has a new replacement: Aveo Pharmaceuticals (AVEO).
On Oct. 13, Aveo staged a breakout attempt past a nearly seven-week cup base with a 9.47 proper buy point amid a very tough market. The stock gained more than 9% and volume burst past 1 million shares, nearly triple its usual amount over the past 50 sessions.
Since then, the rally went into higher gear.
On Tuesday, Aveo shares soared 42% in massive volume on news that it will get acquired by South Korea's LG Chem for $15 per share. The all-cash transaction values Aveo at $566 million.
Therefore, Aveo will get replaced by another company soon.
To find the buy point in this Aveo's cup pattern, simply add a dime to the cup's left-side peak, in this case 9.37. Given that this is a low-priced stock, you could consider adding just a penny. This would lower the entry to 9.38.
However, you want to see the stock break out powerfully and not crawl past the pivot point.
Also, the bear market continues to wallop growth stocks, making breakouts less likely to succeed. Individual investors will have more success going long in leading stocks when the market is in a confirmed uptrend.
Following the breakout, the 5% buy zone went up to 9.94. So, there was a narrow window of time in which to buy shares within this proper buy range before Tuesday's surprise acquisition news.
Aveo jammed on Oct. 5, up 5.7% in heavy, accelerating volume. Even after major indexes dropped hard on Friday, Aveo mustered a weekly gain of nearly 7.7%. Also, the Oct. 5 session acted as a set-up day. Why? The stock looked on the verge of breaking out of its cup pattern.
Notice on the daily chart how Aveo made profits after clearing a deep cup without handle at 6.29 on June 24. From that breakout, AVEO rallied 49% before settling into its newest base.
Aveo's 50-day moving average has been rising for months and has finally caught up with the stock itself.
The developer of monoclonal antibodies to treat cancer is not yet profitable. But sales soared 235% in the second quarter to $25.3 million. That follows huge year-over-year top-line gains of 321%, 1,866% and 990% in the prior three periods.
Also, the Street sees Aveo turning a profit of 33 cents a share in 2023, which would be a huge turnaround from an expected net loss of 76 cents this year.
Aveo has 34.6 million shares outstanding and a market cap of $315 million.
Ahead of Tuesday's announcement, Aveo's 92 Composite Rating qualified it among the top cheap stocks to buy and watch.
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 include Altus Power (AMPS). Altus, however, reversed sharply lower for the week after rising past a very deep cup's pivot point of 11.45. The stock is testing support at the 50-day moving average after a sharp drop on Sept. 29.
It may also behoove traders to keep a close eye on Quest Resources (QRHC) and Brazilian steelmaker Gerdau (GGB) Both stocks have made the "Fastest Growing EPS" section of IBD Stock Screener among stocks trading under 10 a share. Both issues have made stunning moves since the start of the third quarter.
Amex-listed Flexible Solutions International (FSI) makes the list of stocks priced under 10 and holding top EPS Ratings. FSI has rocketed 95% in three straight days of gains through Oct. 5. Since then, the pullback has been mild and in lighter turnover, a plus.
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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