What Are Good Cheap Stocks to Invest in Right Now
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.
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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 $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 a dollar 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.
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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 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, 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. Today? 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 late Monday; since then, shares have sunk more than 59% 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?
Until lately, TDOC stock had been living well beneath its key 50-day moving average, a bearish sign. The 50-day moving average offers chart readers a critical technical level of medium-term price support and price resistance. Today? Teladoc is struggling hard to bottom out and build a new base.
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Zoom And Teladoc Aren't Alone
Leaderboard member Adobe (ADBE) cleared a 157.99 entry in a five-week flat base in the week ended Oct. 20, 2017. The megacap tech marked a new high of 536 in early September 2020 before cooling off. And the video editing, document management, and data analytics software giant recently staged another new breakout past a new buy point, this time at 525.54.
After its breakout, ADBE stock rallied sharply, gaining more than 28% and hitting the upside profit-taking zone. Adobe has been a mainstay on the IBD Long-Term Leaders. Lately, though, the stock sold off and fell well below its 50-day and 10-week moving averages after reporting decent, but not spectacular, fiscal Q3 results.
A nice rebound is in the works now. Adobe has traced a new cup with handle that offered a new entry point of 659.29. As of Tuesday, the stock is trading in the buy zone.
Still, 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.
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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: Charles & Colvard (CTHR). The expert in lab-produced gemstones is forming a long base that could correctly be called a consolidation pattern. Shares are heating up lately. Yet for now, the proper buy point still stands at 3.40, a dime above a near-term high of 3.30 set on Sept. 2.
Given the considerably large percentage change from 3.30 to 3.40, one could arguably use 3.35 or even 3.31 as the breakout point as well. On Monday, CTHR attempted a breakout and reached as high as 3.48 before pulling back. The stock also appears to be forming a handle; adding 10 cents to the highest price within the handle, or 3.48, generates an alternate entry at 3.58.
The Morrisville, N.C., firm shows mixed IBD ratings.
The Composite Rating is currently at 87 on a scale of 1 (wizened) to 99 (wizardly); that's come down from 96 in recent weeks. But WIT also stands out with a 96 Relative Strength Rating. This means CTHR has outrun 96% of all companies in the IBD database over the past 12 months.
Mutual fund owners in Charles & Colvard stock have jumped to 34 funds as of the second quarter this year from 16 in Q3 2020. Total funds stayed at 34 in Q3.
One fundamental risk with Charles & Colvard? This company has a sketchy history of profits.
It lost money each year from 2015 to 2018, then turned a net profit of 10 cents a share in 2019. Understandably, 2020 was rough. Coronavirus shut the economy and more people stayed home. Perhaps that dampened demand for jewelry. Yet Wall Street expects the company to earn 14 cents a share in the fiscal year ending in June 2022 — down 67% vs. a year earlier — and 17 cents in FY 2023 (ending in June that year), up 21%.
Charles & Colvard earned 42 cents a share in FY 2021.
Last week, the firm reported earnings of 3 cents a share for the September-ended fiscal first quarter, flat vs. a year ago. Sales lifted 30% to $10.3 million. This means over the past five quarters, the top line has now grown an average 43%.
Cheap Stock No. 2
Wipro (WIT). The India-based IT consultant made a superb run-up since bottoming at 2.52 at the low of the coronavirus market crash in March 2020. Shares formed a flat base with an 8.42 proper buy point from June to July, then broke out.
The 5% buy zone went up to 8.83. WIT notched new highs throughout September, hitting as high as 9.80. Two recent down weeks proved harsh for WIT holders. However, shares rebounded handsomely in the week ended Oct. 15 and retook the 10-week moving average.
A renewed sharp drop by WIT, followed by a weak attempt to rebound back above the 10-week line, would constitute a key sell signal. That is, take profits before recent gains shrink further.
The Composite Rating is easing to 89 on a scale of 1 (wizened) to 99 (wizardly). WIT's Relative Strength Rating has faded to an 84.
A new base had formed with a 9.90 entry, 10 cents above the new base's left-side peak. The base lacks symmetry, a flaw. it met the criteria for a flat base. Indeed, an 11% drop from head to toe illustrates a normal pullback after heady gains all year. But the breakout attempt earlier in October week has failed.
Another negative, chart-wise? Within the pattern, WIT shows three down weeks in heavy volume. On the plus side, in the week ended Oct. 8, Wipro did not fall much even as volume grew well above average. This suggests institutional investors eagerly accumulated shares during that sell-off, supporting the stock.
Given the continued inability to rebound with strength lately, this story will consider replacing WIT with another candidate.
Finding The Right Buy Point: Quick Explainer
You might ask: Why was the former entry point in Wipro stock exactly at 8.42?
For starters, we take the highest price on the left side of a flat base — in Wipro's case, 8.32 — then add a dime. Moving 10 cents above the base's high gives the individual trader a sense that large fund managers are earnestly accumulating shares. Again, you want the institutions working with you, not against you.
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.
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Cheap Stock No. 3
Stock No. 2, screening for top IBD Composite Rating: Entravision Communications (EVC). The Santa Monica-based Spanish language media firm owns TV stations and FM and AM radio stations across nine states. The stock broke out of a 4.52 entry point in surging volume during the week ended May 21.
A new base formed; the seven-week cup with handle generated a new buy point at 8.13. The breakout worked for a while. After a 12.5% gain for the week ended Nov. 5, EVC got quickly extended past that proper buy range. The 5% buy zone goes up to 8.54; so a fresh pullback has sent EVC stock below its proper entry.
Wait for strength to return to the stock before considering a new buy.
Before this new breakout, a follow-on buy opportunity emerged in the summer.
During the week ended July 23, the stock made a sound first test of buying support at the 10-week moving average near 5.62. Since then, EVC has pulled back hard frequently, making new tests of institutional support at or near that rising 10-week line.
Buying shares as close as possible to the 10-week moving average amid a healthy rebound offers the intrepid trader a secondary buy point. Shares garnered a 6% gain in heavy turnover in the week ended Sept. 3 after rising 7.9% in the prior week.
Entravision's IBD ratings include a 76 Composite — rising, yet still below a preferable level of 90 or higher — and a 98 for Relative Strength. Meanwhile, a B- Accumulation/Distribution Rating keeps heating up and exceeds a neutral grade of C. The stock also pays a dividend; amid recent stock price strength, it now yields 1.2% annually.
The company reported strong second-quarter results on Aug. 5. Earnings tripled to 9 cents a share as revenue vaulted 295% vs. a year ago to $178 million. And Entravision has just posted another superb quarter of results; Q3 earnings jumped 27% to 14 cents a share as sales pole-vaulted 216% to $199 million. Entravision has now posted quarterly sales topping $100 million for the fourth consecutive quarter.
Wall Street sees a profitable future for Entravision, with earnings expected to climb to 43 cents a share this year vs. a net loss of a nickel per share in 2020. Analysts also see earnings rising another 12% to 48 cents in 2022.
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Cheap Stocks To Buy: No. 4
S creening 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.
Not enough time has passed for a brand new base to form. But one is certainly developing. Shares vaulted in October. So, a recent pullback is hardly surprising.
Overall, the uptrend is strong. And a 7.7% gain for the week ended Nov. 5 is in character. At this point, watch for a potential rebound off the 10-week moving average, or, as mentioned above, for a new base to form.
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 an 91 Composite and a 97 for Relative Strength. The stock sports a nifty A- rating for Accumulation/Distribution on a scale of A (heavy net buying by institutions over the past 13 weeks) to E (heavy net selling).
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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 is carving a new pattern — perhaps 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).
On July 29, UMC stock broke out with an 8% gain and rallied into the 5% buy zone, which goes up to 10.42 from the 9.92 buy point. Despite a two-week pullback, UMC bullishly held above the key 10-week moving average. United Microelectronics jammed in the week ended Aug. 27, rallying nearly 9% to get well extended past the 9.92 breakout point. The stock rose another 10.7% ahead the next week in active weekly volume.
Notice how lately, however, the stock is still trading near the top of a long consolidation pattern. Shares recently slipped below the rising 10-week moving average again. A strong move off the 10-week line would offer a bullish sign that demand for shares by mutual funds, banks, hedge funds, pension funds and the like remains robust.
But at this stage, UMC is also building a new base, much like Wipro. A potential handle may also emerge.
Watch to see if the stock continues to hold support at the 200-day moving average on a daily chart, or the 40-week line on a weekly chart. And the next step? A bullish climb back above the 10-week line (drawn in red on IBD and MarketSmith charts), now at around 11.09.
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 31%. The Composite Rating (99) remains fiercely bullish. A Relative Strength Rating of 89? Still solid and improving.
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.
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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 (98 Composite, 96 Relative Strength) has not gained much since the stock surpassed a 4.96 entry in a four-month cup without handle. Shares have been moving sideways, though, refusing to give much ground after an impressive four-week, 51% rally.
Centennial Resources (80 Composite, 99 Relative Strength) broke out in late October, but its rally is stalling. The stock has fleshed out the right side of a cup pattern. Initially, the buy point still stands at 7.62, 10 cents above the left-side high. On Friday, the stock poked above this key entry. Meanwhile, a handle formed, supplying a 7.67 alternate entry point.
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 (88 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 keeping abreast of its 10-week moving average, which has flattened but still slanting slightly higher.
A few more cheap stocks to buy or consider: Lloyds Banking Group (LYG), Lantronix (LTRX), Ring Energy (REI) and Radiant Logistics (RLGT). All of these stocks make the IBD cheap stocks screener in terms of "Top Earnings Per Share Rating." Radiant is trying to climb out of a deep six-month cup at 8.30.
Lantronix, however, is selling off on news Thursday that it priced an offering of 4.7 million shares at 7.50 apiece. LTRX has 29.7 million shares outstanding. The stock came close to piercing the key 50-day moving average.
Ring is sinking bearishly below a 3.42 buy point of its gigantic double bottom pattern.
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.
Please follow Chung on Twitter: @saitochung and @IBD_DChung
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Source: https://www.investors.com/research/cheap-stocks-to-buy/
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