Bull market or bear market? Or a trend-less market as seen for weeks until news late last month that political leaders on both sides of the U.S. chambers of Congress reached a deal to raise the debt ceiling? 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, seems irresistible.
But do you know the unique problems and subtle challenges of hunting cheap stocks to buy for big gains? Let’s consider a few.
The First Challenge
Hundreds of equities trade at a “low” price on both the Nasdaq and NYSE. So, how can you pick the winners consistently? Here’s a second 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 trading volume is thin, the fund manager would have an awfully tough time accumulating shares — without making a big impact on the stock price.
Third, IBD research over the decades finds that dozens, if not hundreds, of great stocks each year do not start out as penny shares. They tend to already trade at 20 or 40 a share before they go on mind-blowing rallies.
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. The I stands for institutional ownership.
Cheap Stocks To Buy: Avoid This Pitfall Too
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 dud stock. You also face the losing opportunity of investing in a true stock market leader such as names that enter IBD Leaderboard or a standout in the IBD 50, IBD Sector Leaders, the Long-Term Leaders, or IBD Big Cap 20.
Let’s consider Zoom Video (ZM) in 2020, one of the superstars coming out of the 2020 coronavirus bear market.
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 businesses, supercharged sales and earnings growth, and heavy buying by top-rated mutual funds affirmed a premium in their share prices.
After clearing a deep cup base at 107.44 in February 2020, Zoom rose nearly six-fold to its peak the same year at 588. Now? Zoom stock is working on a new base and trying to bottom out. ZM has climbed above the 200-day line in recent days, a good sign.
After rallying from 63.55 to 85.13 from December last year to early February, the stock has been hitting upside resistance near 74 for more than five months. Thus, an early entry has emerged at 75.10, the top of a handle within its first-stage cup pattern.
Thus, Zoom stock is near a proper buy point.
5 Cheap Stocks To Watch And Buy
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 boatloads of shares to book 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.
Cheap Stocks To Buy, No. 1: More Gains After A Breakout
Cantaloupe (CTLP) surged out of a deep, large cup with handle on May 5 with a 6.22 correct buy point. Shares rose 22% that week in accelerating weekly turnover. Shares continue to show bullish action.
Even though the stock has pulled back, it’s actually testing support at the 50-day line (on a daily chart) and the 10-week moving average (on a weekly). A strong rebound off these key technical levels would spur a secondary buy point.
In fact, the stock recently triggered a key IBD sell rule: Take at least some profits when the gain from a breakout point reaches 20% to 25%. In the case of Cantaloupe, that’s when CTLP rose to a range of 7.46 to 7.78.
Cantaloupe shares pulled back after rallying five weeks in a row, sinking 3.9% in quiet turnover during the first full week of July. At this point, watch for a test of buying support at the 10-week moving average in the future.
As noted above, a strong jump off the 10-week line by CTLP stock may trigger a follow-on buy point.
Shares have soared more than 88% for the year so far.
The handle portion of Cantaloupe’s massive base was long enough to act as a base of its own. Either way, the buy point stayed the same at 6.22, or when it crosses the handle’s high of 6.22.
Disciplined Buys Lead To Disciplined And Profitable Sells
The 5% buy zone from just above 6.22 goes up to 6.53. So, CTLP shares quickly rose out of the ideal buy zone and have gotten extended.
Plus, Cantaloupe briefly surpassed the 20%-25% profit zone, a good time to take at least partial gains.
The stock not only recouped all of May’s declines. It also kept the new breakout intact. Plus, the 10% gain in the week ended June 9 came in accelerating weekly turnover. That’s another telltale sign of healthy and strengthening demand among institutional investors.
Readers who are new to the IBD style of growth stock picking may ask this: Why buy no more than 5% above a pivot point? The answer: You’re less likely to get shaken out with a 7%-8% loss if the stock makes a perfectly normal pullback after a hot run.
Cantaloupe made the IBD Stock Screener as one among 136 stocks with a top Composite Rating and trading under $10 a share. The 83 score is down from a 91 in recent days. The 96 Relative Strength Rating is healthy.
The stock’s relative strength line powered into new high ground last month — a classic sign that CTLP is sharply outperforming the S&P 500. The RS line has cooled off just a bit.
Cantaloupe does not sell fruit. The Malvern, Pa., firm provides both hardware and software for the self-service business market. Its Three Square Market product is a “one stop shop for everything micro markets.” Cantaloupe’s Seed Live software helps users track and analyze sales information in real time.
Shares roared after Cantaloupe reported a 200% spike in fiscal second-quarter earnings to 9 cents a share. Sales rose 20% to $60.4 million. The firm lost a cumulative 16 cents a share in the prior three quarters. However, Wall Street sees Cantaloupe posting earnings of 7 cents a share in the fiscal year ending in June.
CTLP’s market value has surpassed $550 million. The small cap holds 72.5 million shares outstanding and a float of 57.3 million freely traded shares.
Cheap Stocks To Buy, Numero Dos
Luna Innovations (LUNA) replaced Paya, which made this column before it blasted 24% higher on Jan. 9 on news it’s getting acquired. Luna shares broke out of a new base at 10.55 in early March. However, Luna cratered after notching earnings of 8 cents in the fourth quarter, unchanged vs. a year earlier. Sales rose 31% to $31.7 million.
In recent weeks, Luna has continued to rebound well. Still, Luna makes room for Betterware de Mexico (BWMX). The stock has gained as much as 114% so far this year. Shares continue to test holders at the 50-day and 10-week moving averages.
BWMX’s Composite and RS ratings are holding up well in recent days at 92 and 92, respectively.
In recent weeks, the stock retook its current buy point just above 12.39. BWMX is making a slow yet solid effort to exit the 5% buy zone, which goes up to 13.01. Also, based on the weekly chart action, one could also argue that BWMX is trying to clear a line of upside resistance near 13.25 to 13.50.
Betterware de Mexico posted Q1 results on April 27 that saw a 21% dip in earnings to 29 cents a share despite a 93% leap in sales to $181.4 million. In the fourth quarter, Betterware’s profit rose 15% to 29 cents a share, ending a three-quarter slump.
The firm reported Q2 results on July 27 after the close. Earnings rose 5% to 41 cents a share on a 17% rise in sales to $188 million. Normally, IBD’s growth stock selection criteria prefer companies that are seeing profits rising at a faster rate than sales, not the other way around.
Therefore, BWMX stock may get replaced in this column.
Since the 5% buy zone from 12.49 goes up to 13.11, Betterware stock has gotten extended and is thus not a buy right now.
Also, a narrow trendline could be drawn from the year-to-date peak of 12.39 and through the 11.46 near-term high marked on March 16. This trendline produced an aggressive entry point near 10.70, which BWMX cleared in late March.
Mexican stocks have thrived so far this year. For instance, iShares MSCI Mexico (EWW) has cleared through upside resistance near 60; this past week, EWW rallied past 65. So far, the exchange traded fund has gained almost 33% year to date. The ETF in both May and July bullishly passed a test of buying support at the 50-day line.
Another risk with buying Betterware stock? BWMX trades just 24,000 shares a day.
On IBD Live, guest panelist and three time U.S. Investing Championship winner David Ryan and other professional portfolio managers advise limiting a position in a stock to no more than 3%-5% of its average daily volume.
Betterware sells housewares and home cleaning products. Sales have turned from a 34% drop in the first quarter of 2022 to year-over-year gains of 24%, 37%, 56% and 93%. Trailing 12-month sales total $665 million.
According to MarketSmith, analysts have bumped up profit estimates. They now think the company will earn $1.57 a share this year, up 55%, and $1.98 a share in 2024, up 26%. Betterware posted a net profit of 42 cents a share in 2020, $2.38 in 2021 and $1.01 in 2022.
The number of mutual funds owning a piece of the small cap has dwindled to 9 at the end of Q2 this year vs. a two-year peak of 28 funds in both the second and third quarters of 2021. Ownership should rise, not fall.
Cheap Stocks To Buy No. 3: Home Furnishings Play
Arhaus (ARHS) shares have pulled back mildly after rallying as much as 39% in the span of just nine sessions. The pullback back near 10 remains mild for now — highly encouraging. Plus, the 50-day line is now bending higher.
A deep cup pattern is building. While a proper buy point has not yet emerged, one could draw a trendline from the February peak of 15.27, connecting the near-term high of 11.82. This trendline produces an aggressive entry near 11.75. The risk is high. Why? At 11.40, ARHS still trades more than 25% below the deep cup’s left-side high.
In other words, keep an eye out for an overhead supply of potential sellers, especially if the stock encounters resistance near 12 to 14. These investors bought at prior highs and have been stuck with massive paper losses, eager to exit at break-even or with a small loss. If Arhaus stock rises smoothly past 14, then at that point the pattern may morph into a genuine, if deep, cup with handle.
Notice on the daily chart how from March 6 to 13, shares went into a waterfall decline; those who bought during that wicked drop and are still holding on to their shares may be eager to sell if and when ARHS rebounds to the early teens price-wise. In market lingo, IBD calls this the issue of overhead supply.
The Relative Strength Rating of 93 pole-vaulted from a dismal reading of 40 three months ago.
The Ohio-based company specializes in high-end home furnishings and operates 83 showrooms and interior design centers across the U.S. On June 9, it opened a new showroom in Canoga Park, Calif., a busy area of retailing within the highly populous San Fernando Valley west of downtown Los Angeles.
Earnings per share have vaulted 40%, 59%, 143% and 108% vs. year-ago levels over the past four quarters and totaled $1.14 a share. Sales grew 66%, 57%, 50% and 24% over the same time frame. No wonder ARHS receives an unblemished 99 EPS Rating and a top-flight score of A for SMR Rating.
The SMR Rating tracks sales growth, profit margins and return on equity and combines these important fundamental measures into a letter grade from A to E. Prefer those stocks with an A or B. Sometimes, great turnaround stocks may present a lower SMR Rating at the start of their big moves.
One concern for now: the company’s profit is expected to shrink 24% this year to 76 cents a share and inch up 1% in 2024. Indeed, profits have surged in recent years, from 12 cents in 2019 to $1.02 in 2022.
Additional ARHS Chart Analysis
Without question, Arhaus is in base-building mode. Notice how the stock has jumped back above its 50-day moving average. It’s also successfully broken through upside resistance at the slowly rising 200-day line.
So, at this point, Arhaus has not reached an IBD-style viable entry point. However, volume on the downside has calmed down in recent months, a very good sign.
Please check out this Investor’s Corner on new bases to for more insight on the potential chart patterns that could form ahead of a bullish breakout to new highs. Remember, when a stock launches a new rally and hits new highs, everyone who’s long the stock is happy.
Cheap Stocks To Buy No. 4
A small-cap China play has done quite well this year: Jiayin Group (JFIN). A few weeks ago, JFIN held a handsome 96 Composite Rating and a 99 RS score, the highest possible. Shares climbed 10% for the week in a third consecutive weekly advance.
The financial marketplace catapulted out of a new cup past 3.79 in late March. But the stock also continued to build the right side of a massively deep base. Plus, Jiayin has climbed back above the 50-day moving average, a sign of strength.
Recently, a big drop through the 50-day line threatened the advance and made it possible for JFIN to get the boot.
However, JFIN has avoided that type of decline. Now, it’s finished a seven-week cup with handle. This bullish pattern has appeared in great stock market winners for more than a century of U.S. stock market history. Thew buy point is 7.35, or the highest price in the handle.
Also, watch for a potential rise through a trendline near 7.20-7.30.
On March 29, JFIN shares roared 17% higher in the heaviest turnover in more than a year following results in the fourth quarter last year. Action has been choppy, yet JFIN continues to make headway and new 52-week highs.
According to MarketSmith, Jiayin posted net income of $1.45 a share, up 303%. That follows EPS increases of 61%, 93% and 77% in the prior three quarters. However, the stock dived on June 8 after the company posted another quarter of excellent results. Earnings jumped 80% to 76 cents a share on a 103% blast up in sales to $163.4 million.
Short interest in the stock had been relatively high. A few weeks back, shares sold short had jumped to 6.5 times its average daily volume of 2.56 million shares, according to MarketSmith (go to the top left corner of its weekly chart to monitor this figure). This translates to 16.6 million shares sold short, or 12% of its total float of 137.3 million.
But now, short interest in JFIN stock has cratered, down to 0.5 times the average daily share volume of 235,000 shares — 118,000 shares, or less than 1% of Jiayin’s stock float of 25.6 million shares.
How To Spot The Buy Point
IBD’s buy rules traditionally used to add a dime above, say, the handle in a cup with handle, or the left-side peak of a flat base. Now, IBD has reduced it to simply a move past the pivotal price points in these historically proven chart patterns.
Decades ago, William O’Neil, founder and long-time chairman of IBD, preferred to add 1/8th of a point, equivalent to 12.5 cents, to the key resistance level within a base to determine if a stock is in fact breaking out. Before the stock exchanges moved to decimalization of price quotes, stock prices traded in fractions of 1/2, 1/4, 1/8, 1/16, even 1/32nds of a dollar.
Another potential entry point, but still a long ways away? A test of support at the stock’s rising 10-week moving average.
Also, keep an eye on IBD’s current outlook for stocks. The best time to buy growth companies: only when it shows a confirmed uptrend.
Stock No. 5: A Bitcoin Play
While Applied has gotten super-extended past that entry, the stock has been digesting its gains in relatively normal fashion. However, volatility rose on the rebalancing of Russell indexes. For the week ended June 23, APLD shares slid 9.6% in heavy turnover.
Clearly, shares are now experiencing strong upside resistance near 10. However, a strong rebound may set the stage for a new base. On Monday, the stock jumped 16% in very heavy volume that is running 500% above usual levels. Shares are also up 28% for the week so far.
In recent weeks, Applied Digital is finding buyers near its sharply rising 10-week moving average, a promising sign. The current bounce off the 10-week line, at one point near 8.41 earlier this week, serves as a follow-on entry point after its recent breakout. On Tuesday, APLD accelerated its gain with a 16.6% rush higher to its highest closing price so far this year.
At this point, however, the stock needs more time to craft a good-quality base.
The Dallas-based firm runs datacenters and computing power to support both Bitcoin mining and related infrastructure.
In the fiscal third quarter ended February 2022, Applied Digital posted a modest $1 million in sales. Since then, the top line has grown sharply ($7.5 million in the May-ended fiscal fourth quarter, $6.9 million in August quarter and $12.3 million in the November quarter).
Applied Digital posted $14.1 million in sales for the February-ended quarter, likely an all-time record. The swift sales growth has convinced analysts polled by FactSet to raise its earnings forecast for FY 2024 (ending in May that year) to 42 cents a share. That’s down from 46 cents.
That’s a truly dramatic turnaround from net losses of a penny per share, 38 cents and 25 cents from fiscal 2020 to fiscal 2022. The Street forecasts a net loss of 35 cents in fiscal 2023, which ended in May.
The stocks’ IBD Composite Rating had fallen to a 58 from a decent 81. That’s a serious concern, and the Composite score has been hurt by a below-average Earnings Per Share Rating of 27. But on Tuesday, Applied Digital’s Composite Rating surged to an 88.
The RS Rating of 99, according to IBD Stock Checkup, remains marvelous. But if the stock fails to rebound in the coming weeks, it’ll get replaced.
More Cheap Stocks To Watch And Buy
In the meantime, dozens of new stocks have made the IBD Stock Screener as companies with either a top Composite Rating or “Fastest Growing EPS.”
New entrants include Yalla Group (YALA), which bolted nearly 26% in the prior four weeks. In mid-July, the United Arab Emirates-based social networking and gaming platform cleared a 4.70 pivot point in a deep cup with handle. Shares have gotten extended.
Yalla stock has now come within arm’s length of surpassing the deep cup’s left-side peak of 5.57. Watch for another handle to possibly form.
The handle on a cup pattern represents a final shakeout among disgruntled, uncommitted holders. At this point, such holders should be few in number. A good handle shows a downward slope along its lows and volume should fall well below the stock’s average turnover over the past 50 sessions.
The correction within the cup of 39% is a little deeper than ideal.
Nonetheless, YALA has seen much lighter turnover during down weeks over the past 10 months, a good sign. This price-and-volume action indicates the sellers have gotten exhausted.
At one point, YALA traded as high as 41.35 back in February 2021.
First-quarter revenue rose a measly 2% to $73.5 million as profit fell 7% to 14 cents a share vs. 15 cents a year earlier. However, the company has seen stronger revenue increases in the second through fourth quarters, as shown in recent years.
Earnings have fallen five quarters in a row, in the range of -6% (in Q3 2022 vs. a year ago) to -25% (Q4 2022). But Wall Street sees earnings, after sinking 22% this year to 47 cents a share, rebounding 36% to 64 cnets in 2024.
The company is scheduled to post Q2 results on Aug. 7.
5 More Names To Analyze: Electronics Play Pulls Back, At Last
Israeli circuit board contract maker Eltek (ELTK) soared past a 4.64 entry point over a two-day period and had gotten ridiculously extended past the 5% buy zone. Now, shares are trying to gain support at the 10-week moving average for the first time since that rocket-like move two months ago.
Itau Unibanco (ITUB) of Brazil briefly cleared an early buy point at 5.40 before sliding back. The lender also formed a new cup with handle that offers a 5.55 entry point. ITUB stock has strengthened and is now trying to clear the 5% buy zone, which goes up to 5.83.
Additional Watchlist names include Heritage Global (HGBL), which scored an 800% jump in earnings per share on an 84% revenue increase in Q4 and is smartly clearing resistance near 3. Watch for a potential new entry at 4.
Tat Technologies (TATT), the Israel-based specialist in heat transfer and electric motion systems, has rolled smoothly past a long consolidation pattern with a 6.89 proper buy point. The breakout saw heavy volume, a good sign. A new pullback has so far come in lighter trade. The 5% buy zone extends to 7.23.
Tat’s base began forming in September last year. But tight trading in recent weeks has evolved into a flat base with a new entry point at 7.72. The stock is also finding its bullish footing near its rising 10-week moving average.
Tat notched two straight quarters of earnings in the past two quarters. From 2020 to 2022, Tat lost a cumulative total $1.02 a share. Tat’s sales have accelerated from a 4% drop in Q2 of 2022 to gains of 19%, 12% and 26% vs. year-ago levels.
MarketSmith does not list any profit estimates for 2023 or 2024.
TravelZoo (TZOO) had made the IBD Screener on solid ratings. However, shares have slid bearishly below the 10-week line. The stock is clearly forming a new base; those who bought on the recent cup-with-handle breakout at 6.66 need to protect gains and prevent a total round-trip of a very nice short-term price move.
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.
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