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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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 finally on the verge of completing a new base and tries to bottom out. Zoom’s sales growth has slowed to nearly a trickle, going from a 191% blast higher to $956 million in the quarter ended April 2021 to decelerating increases of 54%, 35%, 21%, 12%, 8% and 5% in the past six quarters. Earnings fell vs. year-ago levels in the past three quarters (-22% in the April-ended Q1 FY 2023, -23% in Q2, -4% in Q3).
Fourth-quarter results came out Feb. 27. The company gave stronger than expected first-quarter earnings guidance. However, shares have reversed lower for the week, sinking 4%. Please find more details on the fourth-quarter report here.
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. And don’t forget the No. 1 rule of investing: keep your losses small and under control.
Check Out IBD Live! Trade Top-Quality Stocks With CAN SLIM Experts And Investing Pros
Cheap Stocks To Buy: Biotech Breaks Out
Ardelyx (ARDX), a member of IBD’s biotech industry group, shot out of a new base on Friday after reporting astounding results. Earnings in the fourth quarter jumped to 6 cents a share vs. a net loss of 31 cents in the year-ago period. The reason: Ardelyx reported $44.2 million in revenue, up 44-fold from the $1 million notched in Q4 of 2021.
As the daily chart shows, ARDX surged past a correct buy point of 3.44, a penny above the left-side peak of the six-week amorphous pattern. The small cap has a market value now topping $700 million. Average daily volume is heavy at 7.7 million shares.
IBD’s buy rules traditionally adds a dime above, say, the handle in a cup with handle, or the left-side peak of a flat base. Yet in this case, Ardelyx trades just 3 a share. So, adding a penny suffices to calculate the breakout point.
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 completely 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.
At 3.82, ARDX shares have sailed past the 5% buy zone, which goes up to 3.61. A special IBD buy rule, the 5% buy zone covers the ideal price range in which to buy a breakout. Therefore, watch for a potential pullback near the ideal entry.
In the week ended March 3, ARDX ranked in the top 10 among stocks sold short and trading under $10 a share on trading platform TradeZero; customers sold short a total 1,324 shares at an average 3.75 per share.
Ardelyx Q4 Update
The Waltham, Mass., developer of small molecules that could potentially become therapies for heart, kidney and digestive system ailments has lost money for years. In 2022, Ardelyx posted a net loss of 42 cents a share, but that’s much less than the $1.52 lost in 2021.
Ardelyx said in a news release that it successfully launched Ibsrela and posted $15.6 million in net product sales for the treatment for adult patients suffering from irritable bowel syndrome with constipation. Ardelyx noted a positive appeal for another treatment, Xphozah, following a “productive Type A meeting” with the Food and Drug Administration in February. So, the firm is ready to resubmit its NDA (new drug application) to the FDA and aims to launch this product in the second half of this year.
Xphozah may help control serum phosphorous in patients who are getting dialysis due to chronic kidney disease.
Wall Street has revised its forecast for 2023; it now sees the company losing 34 cents a share, then turning a profit of 15 cents in 2024.
As a monthly chart shows, ARDX has fallen sharply since peaking at 35 in December 2014. The long-term plunge highlights the risk in biotech stocks. However, Ardelyx is poised to register an eighth monthly gain in nine months. That impressive run hints at renewed institutional accumulation in the small cap — the I in CAN SLIM, IBD’s seven-point paradigm for successful investing in growth stocks.
According to MarketSmith, IBD’s biotech/biomedical industry group ranks No. 38 among 197 industries for six-month price-weighted performance.
Please go to IBD Data Tables at Investors.com to see the complete daily rankings of all 197 industry groups.
Cheap Stocks To Buy: Will Luna Break Out?
Luna Innovations (LUNA) joins this column, having replacing Paya (PAYA), which blasted 24% higher on Jan. 9 on acquisition news. Luna makes the stock screener’s top stocks in terms of Relative Strength Rating and trading under 10 a share.
Last week, Luna Innovations got placed removal watch after falling 4.9% in rising turnover on Feb. 21, the day right after the three-day Presidents Day holiday weekend. The stock undercut its 50-day moving average for the first time in more than four months.
Further declines could spell a change in the stock’s character. However, the stock has taken a bullish change of course with a 14% rally for the week. Volume accelerated, a sign that investors rushed to grab shares.
For now, a new base continues to form with a 10.55 entry point. A 19% correction off the latest high of 10.45 high is mild.
As the weekly chart shows, the Roanoke, Va., maker of sensing, test and measurement tools for fiber optic equipment has made a blistering run since bottoming near 4 in October.
The stock cleared a cup with handle at 6.54 in late November and got quickly extended past the 5% buy zone, which ran up to 6.87. Shares rallied almost 60% in seven weeks and hit a 52-week high of 10.45 before taking a break.
Lately, the stock has moved sideways and gotten support near the 10-week moving average near 8.90. A strong boost off the 10-week line, currently at 9.30, would engineer a follow-on buy point. But LUNA’s action has gotten more choppy lately.
Luna has notched big profit growth in three of the past four quarters, including gains of 60% in the fourth quarter of 2021, 67% in Q1 2022, and a 200% surge in Q3 2022. In Q2 last year, Luna posted a net loss of 2 cents a share.
Sales have grown 79%, 32%, 26%, 7%, 19% and 43% vs. year-ago levels in the past six quarters. Wall Street sees profit rising 55% from 22 cents a share in 2022 to 34 cents in 2023. The company turned a profit of 4 cents per share in 2018 and has grown the bottom line steadily since then.
Mutual funds own 36% of 33 million shares outstanding, according to MarketSmith data.
Stock No. 3: Extended, Yet Still Worth Watching
LSI Industries (LYTS) continues to excel. Last week, the stock cracked through the 15 price level for the first time since early 2008. Lately, it’s getting some pushback. Yet LYTS has certainly acted as one of the best stocks since making IBD Stock Screener for companies with a top Composite Rating and trading under 10 a share.
The shallow pullback of less than 11% in LYTS over the past five weeks resembles a flat base. Therefore, a chart reader could argue a strong move past 15.08, 10 cents above the 14.98 high, would spell a new breakout.
In February, LYTS completed a fourth month in a row of gains, rising nearly 5.8% in February. Shares are now up 20% year to date despite some clear profit-taking on Tuesday.
In the week ended Jan. 27, LSI shares propelled 12% higher in massive turnover on the back of another robust quarterly report. The recent pullback has stayed mild, a bullish sign.
Fiscal second-quarter earnings jumped 73% vs. a year earlier to 26 cents a share. A truly impressive gain considering that in the December-ended quarter a year ago, profit grew 67%. LSI’s sales rose 16% to $128.8 million. That marked a seventh straight quarter of double-digit increases in the top line. However, the rate of growth decelerated again. In recent quarters, growth peaked at 53% during the first quarter of 2022; LSI posted gains of 31% in Q2, then 19% year over in Q3.
Nonetheless, recent price-and-volume action indicates heavy institutional accumulation of LYTS shares.
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 earlier in December? Highly constructive, especially given its solid run-up since October. And on a daily chart, LSI tested support at the 21-day exponential moving average. Support at the 21-day line has continued in recent weeks too.
LYTS sports a 99 IBD Composite Rating on a scale of 1 to 99 and a Relative Strength Rating of 98, next to the best possible. The SMR Rating, measuring sales, profit margins and return on equity, gets a notably bullish grade of B on a scale of A to E, according to IBD Stock Checkup.
Notice how in most of its up days since early November, volume rushed above the stock’s 50-day average. The market’s message? Mutual funds, hedge funds, large investment advisors, banks and the like grabbed shares with conviction. As of the end of 2022, as many as 108 mutual funds owned a piece of LYTS, according to MarketSmith data. That’s down from 108 funds a year ago, but up from 96 in Q2 and 100 in Q3 last year.
A Solid Double Bottom Pattern
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. One such entry: a test of support at its climbing 10-week moving average.
The Street has upgraded its estimates, and now sees fiscal 2023 profit rising 33% to 85 cents a share and up another 6% to 90 cents in FY 2024. The fiscal year ends in June.
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Cheap Stock No. 4
Brazil financial app operator Inter & Co. (INTR), featured in the second half of 2022, has struggled to recover after sliding beneath its 50-day moving average in September. Newly in its place: Concrete Pumping (BBCP).
The maker of cement pumpers staged a breakout on Jan. 24. Shares jumped 19.5% in the heaviest volume in more than two months following results in the October-ended fiscal fourth quarter. BBCP also surpassed a 7.81 proper buy point in a 10-week cup without handle. That pattern sits within a much larger, deeper base.
To get the buy point, typically add a dime to the cup’s left-side high, or in this case 7.71, to get 7.81. The 5% buy zone runs up to 8.20.
After surpassing a clear buy point in January, shares reversed lower amid a recent change in the IBD current outlook for the stock market. Yet shares are rebounding again and are in the buy zone again.
During the late January breakout, the stock’s relative strength line rushed into new high ground, a bullish sign.
Concrete Pumping made the top Composite Rating section of the IBD Screener for top stocks trading under 10 a share. The Composite score has moved back up to 95. The Relative Strength Rating has rebounded to 89, a big improvement from 47 a month ago.
A weekly chart shows that the stock struggled after a breakout attempt past 9.51 in the week ended Nov. 12, 2021. The steep drop that followed reaffirmed the golden rule of investing: Keep losses small, ideally at no greater than 7%.
The Thornton, Colo., firm’s market value tops $400 million. The company has posted steady and strong earnings and sales since the quarter ended in July 2021. For the fiscal year ended in October last year, Concrete Pumping earned 51 cents a share vs. a net loss of 31 cents in FY 2021.
Sales have not simply grown for seven quarters in a row. They have also shown an accelerating rate of growth, and that highlights something special may be going on with the company. After a 4% dip in the quarter ended in January 2021, the top line has risen 4%, 5%, 11%, 21%, 26%, 29% and 31% vs. year-ago levels over the past six quarters.
In the October-ended fiscal fourth quarter, Concrete Pumping’s earnings vaulted 180% to 14 cents a share.
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Arcos Dorados (ARCO) has joined the IBD Screener as a top Composite Rating scorer among companies trading under 10 a share. The stock is trying to rebound after making a sharp pullback. The RS Rating of 83 has slipped in recent weeks.
The company operates and franchises more than 2,200 McDonald’s restaurants across Latin America and the Caribbean.
Arcos Dorados has broken out past resistance at 8 after forming two bases over the past 12 months. They include a double bottom from April to August 2022, and an amorphous base that showed an 8.34 buy point — 10 cents above the nearly five-month base’s high of 8.24.
At 8.91, Arcos had gotten extended past the 5% buy zone, so one should not chase after the stock at that price. And the pullback shows just why. ARCO is trading mildly below the breakout price of 8.34.
The small cap has 213 million shares outstanding and a float of 131.5 million. Both counts have gotten a boost recently. Arcos has delivered fantastic fundamental growth over the past five quarters.
In the past two quarters alone, Arcos expanded earnings 250% and 83% vs. year-ago levels on sales gains of 50% and 27%. No wonder it gets a top-drawer 99 Composite Rating.
The Accumulation/Distribution Rating, measuring the intensity of institutional buying vs. selling over the past 13 weeks, shines at A- on a scale of A to E. An Accumulation grade of C marks a neutral level of buying vs. selling among fund managers.
Arcos reports Q4 results on March 15.
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Enerplus (ERF), which has a $3.8 billion market value, leads IBD’s Canadian oil and gas exploration industry group. On Dec. 5, ERF got hammered along with its peers. WTI light sweet crude oil futures and natural gas both fell sharply.
After showing signs of a meaningful rebound in January, the stock is making a critical test of the long-term 200-day moving average. At 16.23, shares remain under water for the year.
A new base-on-base pattern has emerged, generating a 19.33 proper buy point. The stock has not broken out yet, so for now it is not a buy. On Friday, ERF reversed higher for the week, gaining 1.5% amid a 2.7% slide by the S&P 500.
ERF shares tanked 11% in the week ended Dec. 9. While volume also fell below average, the sharp price drop justified locking in gains or cutting gains. At the time, the big undercut of the 10-week moving average constituted a critical sell signal. Yet Enerplus is trying to stage a new rally.
Its Composite Rating was as high as 92 recently, but dropped to an unfavorable 77. So at this point, chances are growing that this story will find a replacement for ERF.
The 70 Relative Strength Rating is rising again, yet has fallen from a once-stout score of 96 at the start of the year on a scale of 1 (worst) to 99 (best). The RS Rating assesses ERF’s relative price activity over the past 12 months. These ratings should be used only to judge stocks as possible buy candidates, not for when to sell stocks.
Enerplus’ Q3 earnings soared 156% vs. a year earlier to 87 cents a share on a 98% sales jump to $720.5 million. It marked the biggest sales for a single quarter for at least the past two years. Enerplus’ fourth-quarter earnings rose 56% to 78 cents a share on a 10% boost in sales to $548.4 million. The growth comes on top of very tough year-over-year comps. In Q4 of 2021, Enerplus registered 614% growth in EPS and a 218% vault in sales.
What Is The ‘Correct Buy Point’?
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 has rebounded sharply. On Nov. 10, shares shot 8.7% higher and closed above its 200-day moving average for the first time in nine months. In 2023, EVC’s rally continues to gain traction.
A new cup with handle formed with a 5.83 buy point for EVC. Shares broke out this month and at one point surpassed the 20%-25% profit zone.
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.
Direct Digital (DRCT), Heritage Global (HGBL) and dry bulk shipping firm Eneti (NETI) recently made the IBD Stock Screener for top stocks in the Composite Rating and trading under 10 a share.
Chinese video streaming service iQiyi (IQ) also now makes the screen. The stock has been leading its 10-week moving average higher for near four months.
All four candidates show wonderful growth in the top line in the past quarter or two. All four are reaping big profits.
Want To Find The Best Cheap Stocks On Your Own? Please Check Out IBD Stock Screener
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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