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.
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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, 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, 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 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 retook its 50-day line last week. After hours on May 22, Zoom rose 1% after reporting fiscal Q1 results (EPS up 13% to $1.16, revenue up 3% to $1.11 billion). But by week’s end, investors pushed the stock 4% lower in massive volume.
Lately, the stock is holding above its April 28 low of 60.45. Zoom is still testing key buying support near its 50-day moving average.
Prior to its latest quarterly report, Zoom’s sales growth had slowed to nearly a trickle, going from a 191% blast higher to $956 million in the quarter ended April 2021 to shrinking gains of 54%, 35%, 21%, 12%, 8%, 5% and 4% in the next 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?
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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 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, but there is no buy point right now. 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.
Now, shares are pulling back after rallying five weeks in a row. It had rallied 6.4%, 10%, 1.9%, 2.8% and 3.2% in the prior five weeks.
Shares have soared 83% for the year so far.
The handle portion of Cantaloupe’s massive base is long enough to act as a base of its own. Either way, the buy point stays 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.
Recently, the stock not only took back all of its declines in May. It also kept the new breakout intact. On June 1 and 2, the stock advanced in above-average volume, a sign of unusually healthy demand.
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. That rating has stayed stable for days at 89, then edged up to a sterling 91. The 96 Relative Strength Rating is rising again and 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 since cooled off 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 $570 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 (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 106% so far this year. Shares are pulling back lately and testing buyers at the 50-day and 10-week moving averages.
BWMX’s Composite and RS ratings are holding up well in recent days at 95 and 95, respectively.
In recent weeks, the stock retook its current buy point just above 12.39. BWMX is trying to exit the 5% buy zone, which goes up to 13.01, but this past week’s action has seen elevated volatility. Therefore, BWMX remains in buy range.
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.
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.
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.
BWMX is now showing more bullish action as it regained the 21-day exponential moving average. Shares are also leading the 21-day line higher. For now, Betterware de Mexico’s 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 29% year to date. The ETF in May bullishly passed a test of buying support at the 50-day line. A new test is looming.
Trading Risk
BWMX trades just 26,000 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%.
According to MarketSmith, analysts think the company will earn $1.53 a share this year, up 51%, and $1.64 a share in 2024, up another 7%. 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: AEYE Out After Losing Key Support
Thinly traded AudioEye (AEYE) joined this column in the final week of March. For a while, a new, shallow base appeared to be forming.
However, shares dived more than 10% on May 25 and clipped the 200-day moving average on its daily chart, a negative sign. Meanwhile, the stock ran into a wall of sellers on Tuesday as it tried to rebound above the key 50-day moving average.
Such action clearly points to anxious selling. However, AudioEye rebounded later in the week and finished with an 11.3% gain in heavy volume in the week ended June 2.
The stock also continues to hover above its 200-day line, an encouraging development. However, its Composite and Relative Strength scores have turned stagnant.
Also, AudioEye’s relative strength line has been sloping lower for more than two months. You’d prefer to see the RS line rising, not falling. Please find the relative strength line drawn in blue on all charts on MarketSmith, Investors.com, and Leaderboard.
Therefore, Arhaus (ARHS) joins the list as a new candidate. 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.
The Relative Strength Rating of 94 is good and keeps heating up. The rating also pole-vaulted from a dismal reading of 19 nearly six weeks ago.
According to IBD Stock Checkup at Investors.com, Arhaus scores a pleasant 92 Composite Rating. So watch to see if ARHS’ IBD Composite Rating keeps strengthening.
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.
Arhaus maintains a very and its fundamentals are snazzy, to say the least.
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 26% this year to 76 cents a share and stay flat in 2024. Indeed, profits have surged in recent years, from 12 cents in 2019 to $1.02 in 2022.
ARHS Chart Analysis
Without question, Arhaus is in base-building mode.
Notice how the stock recently jumped back above its 50-day moving average. It’s also successfully broken through upside resistance at the lifting 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.
Want To Find The Best Cheap Stocks On Your Own? Check Out IBD Stock Screener
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 95 Composite Rating and a 99 RS score, the highest possible.
The financial marketplace catapulted out of a new cup past 3.79 in late March. But the stock is also continuing to build the right side of a massively deep base. Plus, Jiayin is making two tests of the 50-day moving average in two weeks after the successful breakout. However, JFIN has broken below the 50-day line and fallen further.
Such action makes it likely that it will get replaced.
At one point, a strong jump off that 10-week moving average, on a weekly chart, in solid or at least expanding turnover would have triggered a follow-on entry point amid a bullish stock market. JFIN share rose 2.8% for the week, and the rebound is going well so far.
But that did not happen.
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 absolutely cratered, down to 0.8 times the average daily share volume of 206,000 shares — 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.
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.
Stock No. 5: A Bitcoin Play
Applied Digital (APLD) soared in record-breaking turnover during the week ended May 19. APLD rifled past a correct buy point at 3.74.
While Applied has gotten super-extended past that entry, the stock has been digesting its gains with grace. That is, the small cap has been moving sideways, refusing to give up even a portion of that 198% rocket-like move in only the space of one week. However, volatility rose last week amid the rebalancing of Russell indexes. APLD shares slid 9.6% in heavy turnover.
Clearly, shares are now experiencing strong upside resistance near 10. A little more time, however, may set the stage for a new base.
On Friday, APLD shares bolted past this entry and briefly remained in the buy zone before the negative reversal.
Normally, however, bases should be a minimum five weeks for the flat base and at least six weeks for the cup without handle. So please keep this in mind.
As seen on a weekly chart, the stock is also testing key support at its rising 10-week moving average, which is drawn in red on all IBD charts.
It has the look of a flat base, but in APLD’s case, it’s too deep. The correction reached 29% from the highest price within the base in question to the lowest price.
The Dallas-based firm runs datacenters and computing power to support both Bitcoin mining and related infrastructure.
In the 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 50 cents a share.
That’s a truly dramatic turnaround from net losses of a penny, 38 cents, 25 cents and 31 cents in the prior five years.
The Composite Rating has fallen further in recent days to 61 from a decent 81. That’s worrisome. However, the RS Rating of 99, according to IBD Stock Checkup, remains marvelous.
How To Find The Best Cheap Stocks: IBD Stock Screener
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 Overseas Shipholding (OSG). The NYSE-listed transporter of crude oil and petroleum-based products broke out June 21 with an 11% jump in massive turnover.
The stock cruised past a 4.02 buy point within a 10-week base. At 4.43, the stock had gotten sharply extended. But as this story noted, watch for a potential pullback into the 5% buy zone, which goes up to 4.22.
That’s exactly what happened on June 22; shares dropped 6.3% to 4.15 as volume spurted 91% above its 50-day average.
That heavy volume, however, did not exceed the more than 1.6 million shares that exchanged hands on Wednesday, 290% higher than its average over the past 50 sessions.
The company has posted excellent earnings in each of the past four quarters. In Q1, Overseas Shipholding earned 14 cents a share vs. a net loss of a penny in the year-ago quarter.
Sales rose 9%, extending increases in the top line to five quarters in a row.
The following names also deserve monitoring.
Israeli circuit board contract maker Eltek (ELTK) soared past a 4.64 entry point over a two-day period and is now ridiculously extended past the 5% buy zone.
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 shares have broken out and gotten extended after recently posting an 13th gain in 14 trading sessions.
Also recently making IBD Stock Screener: Travelzoo (TZOO), which cruised out of a good cup with handle on April 27 at 6.66 and made solid gains. TZOO is now working on a new base.
TZOO made the IBD Screener’s top stocks in terms of Relative Strength Rating (currently a 98) and trading under 10 a share.
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; and Avadel (AVDL), which is developing treatments for narcolepsy. Avadel is winning a battle of buying support at its fast-rising 21-day exponential moving average. At 15.07, Avadel has cruised 110% ahead since Jan. 1.
Heritage has gotten way extended after blasting higher seven days in a row through Thursday’s close.
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.
Sonim Technologies (SONM), which belongs to IBD’s telecom-consumer products industry group, is creating a new base with a buy point past 1.27. Chile’s energy utility Enel Chile (ENIC) has rebounded off the rising 10-week moving average for at least the fourth time after a successful breakout past a cup without handle at 1.95 back in late November 2022.
Tat Technologies (TATT), Israel’s 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.
Tat’s base began forming in September.
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.
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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