Bull market or bear market? Or a 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.
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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, sounds 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? 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, 30 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.
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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 dud stock. You also face the lost opportunity of investing in a true stock market leader such as those 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 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 business, supercharged growth in sales and earnings, and significant 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 retook its 50-day line last week.
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%, 5% and 4% in the past seven quarters. Earnings fell vs. year-ago levels for the fourth straight quarter (-22% in the April-ended Q1 FY 2023, -23% in Q2, -4% in Q3, -5% in Q4).
So, can you employ the CAN SLIM strategy for cheap stocks to buy as well?
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.
Check Out IBD Live! Trade Top-Quality Stocks With CAN SLIM Experts And Investing Pros
Cheap Stocks To Buy, No. 1: New Breakout
Cantaloupe (CTLP) surged out of a deep, large cup with handle with a 6.32 correct buy point. Shares rose 22% in the week ended May 5 in accelerating weekly turnover.
The handle portion of this base is long enough to act as a base of its own. Either way, the buy point stays the same at 6.32, a dime above the handle’s high of 6.22.
The 5% buy zone from 6.32 goes up to 6.64. Thus, shares are now trading within the ideal buy zone.
Why buy no more than 5% above a pivot point? 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 rating has eased to an 88, still good. The 95 Relative Strength Rating is superb.
The stock’s relative strength line powered into new high ground, a sign that CTLP is sharply outperforming the S&P 500.
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 has 72.5 million shares outstanding and a float of 57.2 million freely traded shares.
Stock No. 2: Brand New IPO
ARB IOT Group (ARBB) debuted on the Nasdaq in the first week of April. Since then, it’s understandably proven a very wild ride, at least on a percentage basis.
ARB IOT holds a solid 93 Composite Rating, down from 97 the prior week.
In the final week of April, ARBB made a new high of 5.40 and rallied as much as 16%. But shares swan-dived to 4.10 for an 11.8% loss for the week, snapping a three-week winning streak. Two weeks ago, the stock fell to a post-IPO low on May 2. But it cut losses for the week ended May 5 to 5.6% and finished in the upper half of the weekly trading range.
ARBB stock has yet to form a true IPO base. So, no new buy point has emerged for now. But one may be in the works. For now, 5.50 could become a potential entry. More time is needed to flesh out the current pattern.
It makes sense to watch the stock from the sidelines and see if a tighter trading range emerges.
A good IPO base can form in as few as seven sessions. ARBB goes into its eighth week of trading.
The Kuala Lumpur, Malaysia-based company serves clients in the Internet of Things (IOT) market. It assists clients from the concept phase to design, from testing and commissioning of systems and devices to product deployment. The company aims to capture business emerging from the AI, cloud computing, 5G and robotic process automation (RPA) markets.
ARB said in filings to the SEC that it’s secured a cumulative order book of $37.7 million for its smart home and building business since a 2019 launch. These orders would serve the Malaysian states of Selangor, Perak and Penang, which together make up 33% of the country’s total population.
“Our mission is to become a leading player in the IoT landscape in the ASEAN region,” ARB IOT Group said in its 424B filing to the Securities & Exchange Commission.
Since ARB IOT is both an “emerging growth company” and a “foreign private issuer,” as defined under U.S. securities laws, it is eligible for “reduced public company reporting requirements for this and future filings.”
After the IPO deal, ARB Berhad will own 95.2% of the firm’s outstanding ordinary shares. But the company noted in its 424B filing that it does not intend to utilize certain exemptions from corporate governance requirements by the Nasdaq as a “controlled company.”
In the meantime, big earnings and revenue growth over the past few years help back up its solid Composite Rating of 97.
The RS Rating of 82 has fluctuated between the high-60s to the mid-90s. Keep in mind that the Relative Strength Rating generally covers 12 months’ worth of price action vs. all other companies in the IBD database.
According to MarketSmith, ARB IOT reports results on a six-month basis. During the second half of 2021, the company posted earnings of 22 cents a share on a 342% leap in sales to $41.2 million. In the first half of 2022, ARB IOT reported earnings of 42 cents a share, up 144% over the same six-month period a year earlier. Sales soared to $71.6 million vs. $3.2 million.
Excluding the market debut on April 5, the stock trades roughly 200,000 shares per day. ARBB has 26.5 million shares outstanding, a float of just 1.1 million shares, and a market value of $110 million.
For now, no data regarding analysts’ top and bottom-line estimates appear on Yahoo Finance.
Cheap Stocks To Buy: No. 3
Thinly traded AudioEye (AEYE) joined this column in the final week of March. A new base appears to be forming. For now, a new entry has emerged at 7.99.
On March 30, AEYE briefly cleared a roughly seven-week cup-like base with a 7.47 proper buy point. The stock reversed lower the next day after notching a 52-week high. Shares still rocketed 22% higher for the week in accelerating volume.
The stock pulled back in mid-April in a measured way. However, chart action darkened after AEYE cut through its 50-day moving average last week. AEYE has now regained that key technical level. Plus, the stock is beating the market, up 58% for the year so far.
If a fresh breakout succeeds, AudioEye should coast past the 5% buy zone, which goes from 7.47 up to 7.84. That hasn’t happened yet.
On a weekly chart, the stock is now trading above both the 10-week and 40-week moving averages. That’s a good sign. Yet for now, it perhaps needs more time to craft a new base.
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The Tucson, Ariz., firm calls itself as a “web accessibility platform for businesses of all sizes” and says it’s No. 1 in web accessibility. The company’s platform helps clients integrate with a number of popular software and ecommerce platforms, ranging from Google Tag Manager to HubSpot to Shopify, from Squarespace to Wix to Word Press.
AudioEye has yet to post an annual profit. However, the company posted earnings of a penny per share in both the third and fourth quarters of last year. Sales have risen 14% to 36% vs. year-ago levels in the past eight quarters. On average, the top line jumped 21% over this time frame. Total 12-month sales have grown to almost $30 million.
AEYE is truly a micro cap; it trades just 25,000 shares per day. So please take account the liquidity risk. On average, less than $250,000 worth of stock gets traded each day. Compare that with Travelers (TRV) in the Dow Jones Industrial Average; it trades 1.5 million shares each day, or more than $270 million in dollar volume on average.
According to MarketSmith data, just 24 mutual funds own a piece of AudioEye stock. Management owns 39% of the company’s 11.7 million shares outstanding. AudioEye’s market value has crossed past $80 million. It made IBD Stock Screener for Top Composite Rating stocks trading under 10 a share.
Three weeks ago, the stock sported a 92 IBD Composite Rating on a scale of 1 to 99. It’s now 84, which is disappointing. AEYE stock holds a 12-month Relative Strength Rating of 91. Meanwhile, the relative strength line has risen to a six-month high. This means AudioEye has been outperforming the S&P 500.
On Wednesday, AudioEye posted a net loss of a penny per share, much less than the 9 cents it lost a year earlier. Sales rose 12% to $7.8 million. That marks at least eight quarters in a row of double-digit top-line growth. But it also was the smallest year-over-year increase in that time frame.
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Cheap Stocks To Buy: New Biotech
Ardelyx (ARDX), a member of IBD’s biotech industry group, shot out of a new base on March 3 after reporting astounding fourth-quarter results. However, after an impressive short run that produced a 49% gain, the stock has slid sharply. It lost vital support at the 50-day moving average, a key level of support and resistance.
Therefore, in Ardelyx’s place: Aurinia Pharmaceuticals (AUPH), which has cleared a nine-month entry of 10.53 in a deep cup-with-handle base before sliding back.
As the daily chart shows, Aurinia faced a test of support at the 50-day moving average, which has risen to 10.55. In other words, AUPH has not just pulled back to its cup-with-handle entry of 10.53. A rebound off the 50-day line would indicate that demand for shares among mutual funds, hedge funds, pension plans, banks, insurers and the like is healthy and strong.
The 5% buy zone from 10.53 goes up to 11.06.
The member of IBD’s biotech industry group holds a 91 Composite Rating and a 96 RS score.
The developer of therapies for autoimmune diseases is not yet profitable. In the past four quarters, Aurinia lost a cumulative 67 cents a share. But sales have grown substantially, rising 326%, 280%, 22% and 59% vs. year-ago levels over the same time frame. Trailing 12-month sales totaled $147 million.
Aurinia has a market value of $1.52 billion, 143 million shares outstanding, and a float of 137.3 million. The Victoria, British Columbia-based firm went public in September 2012 and trades on the Nasdaq.
How To Spot The Buy Point
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 had traded at 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 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.
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.
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.
Cheap Stocks To Buy, Numero Cinco
Luna Innovations (LUNA) replaced Paya (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.
Therefore, Luna is out and makes room for Betterware de Mexico (BWMX). The stock has gained as much as 106% so far this year. BWMX’s Composite and RS ratings are holding up well at an identical 93. The stock is trying to retake a new buy point.
Betterware de Mexico is pulling back after posting 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. On Wednesday, the stock halted a four-day losing streak, and one point gaining more than 5%.
Despite the recent pullback, BWMX has set up a good base, a long first-stage cup with handle. The breakout attempt has hit upside resistance, but the 12.49 proper buy point remains valid. Shares are up 7% so far this week.
Also, a narrow trendline could be drawn from the year-to-date peak of 12.39 and through the 11.46 near-term high. This trendline produced an aggressive entry point near 10.70.
Shares of the thinly traded company have rallied nicely after securing buying support at the rising 50-day moving average last month. In the week ended March 31, the stock outperformed the S&P 500 and the Nasdaq with a 14.9% weekly gain in heavy turnover.
BWMX would show more bullish action if it regains the 21-day exponential moving average. The emerging uptrend still holds.
Mexican stocks have thrived so far this year. For instance, iShares MSCI Mexico (EWW) has cleared through upside resistance near 60. So far, the exchange traded fund has gained more than 27% year to date.
BWMX trades just 42,000 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% and 56%.
In the fourth quarter, Betterware’s profit rose 15% to 29 cents a share, ending a three-quarter slump.
According to MarketSmith, analysts think the company will earn $1.53 a share this year, up 51%, and $1.64 a share in 2024. 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 10 at the end of 2022 vs. a two-year peak of 28 funds in both the second and third quarters of 2021. Ownership should rise, not fall.
Please read all about the I in CAN SLIM, which stands for healthy and increasing institutional sponsorship, a critical factor for determining the true market leaders.
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LSI Industries (LYTS) continues to excel since the summer of last year. However, the stock felt the market’s selling heat on March 10, falling 10% in heavy volume. Shares also undercut the 50-day moving average for the first time in more than four months.
A new base is now in the works.
As seen on the weekly chart, LSI Industries clipped its 10-week moving average as volume jumped 36% above average levels during the week ended March 17.
Several weeks of trading below the 10-week moving average is not an issue. But an extended period of time, in the 8-to-9-week range or longer, would be. LYTS finished nine weeks in a row beneath its now falling 10-week line.
A continued decline, especially in heavy turnover, could trigger a defense-type sell rule in LYTS stock.
In late February, the stock cracked through the 15 price level for the first time since early 2008. Lately, it’s getting serious 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 from the week ended Jan. 27 to late February resembled a flat base. Therefore, a chart reader could argue a strong move past 15.08, 10 cents above the 14.98 high hit on Jan. 26, would spell a new breakout.
However, the market’s rising volatility threw cold water on the breakout attempt. Indeed, the pattern revealed a wedging look, rather than pure sideways, tight action.
In the week ended Jan. 27, LSI shares propelled 12% higher in massive turnover on the back of another robust quarterly report.
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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 a high degree of profit taking by institutional investors. Why? It’s notched no fewer than four down days in above-average volume since March 10. The March 13 decline did not do much damage, though. That session appeared to highlight fund managers coming in to shore up the stock.
LYTS sports a 97 IBD Composite Rating on a scale of 1 to 99. The stock also hosts a 12-month Relative Strength Rating of 95. 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 the first quarter, as many as 121 mutual funds owned a piece of LYTS, according to MarketSmith data. That’s up from 106 funds a year ago.
A Solid Double Bottom Pattern
On Nov. 2, LYTS cleared a beautiful 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 27% to 85 cents a share and up 17% to 99 cents in FY 2024. The fiscal year ends in June.
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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.” They include Applied Digital (APLD), which soared in heavy turnover last week and took out a buy point at 3.74; Israeli circuit board contract maker Eltek (ELTK), which pole-vaulted over a 4.64 entry point over a two-day period and is now ridiculously extended past the 5% buy zone; and Kinross Gold (KGC), which is trying to stay abreast of a cup-without-handle entry at 5.
Meanwhile, Midwest-based Burger Time restaurant chain BT Brands (BTBD) is cooking up a new base with an entry at 3.01 but is extremely thinly traded. Itau Unibanco (ITUB) of Brazil has cleared an early buy point at 5.40 but is also forming the right side of a new base. Gambling.com (GAMB) is perhaps working on a neighbor base after an April 25 breakout flopped quickly.
Gambling.com has grown its revenues 70%, 53%, 94% and 107% vs. year-ago levels in the past four quarters. The Street sees profits barreling 200% higher to 63 cents a share this year and up 29% in 2024.
Also recently making IBD Stock Screener: Tingo Group (TIO), which rocketed out of a five-month consolidation pattern at 1.36, surging 25% a few weeks ago; and financial marketplace Jiayin Group (JFIN), which catapulted out of a new cup base at 3.89 in late March.
On March 29, JFIN shares roared 17% higher in the heaviest turnover in more than a year following Q4 results. 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.
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 clearing resistance near 3; and Avadel (AVDL), which is developing treatments for narcolepsy.
Avadel has broken out of a new cuplike base with a 10.30 buy point and is now sharply extended. But the stock is trading tightly after superb gains, a good sign.
The six-week base sits next to a longer, deeper cup without a handle.
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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