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 .
Which Fast-Growing Large Caps Show Strong IBD Ratings? Check Here
Cheap Stocks To Buy: First, Understand These Pitfalls
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 struggling as it forms a new base and tries to bottom out after falling to a multiyear low of 70.44.
Shares lost buying support at the 50-day moving average on Aug.
11.
The company announced second-quarter results on Aug.30 , and quarterly results since then have shown a dramatic growth slowdown.Shares are rebounding lately and trying to bottom out, but not before sinking as much as 88% below their all-time high of 588.
So, can you employ the CAN SLIM strategy for cheap stocks to buy as well?
The Big Picture: Will The Nasdaq, S&P 500 Begin A 4th Leg Down?
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.
Check Out IBD Live! Trade Top-Quality Stocks With CAN SLIM Experts And Investing Pros
And don’t forget the No.1 rule of investing: keep your losses small and under control .
Cheap Stocks To Buy: Extended, Yet Still Worth Watching
LSI Industries ( LYTS ) had an amazing gain last week, even as the major indexes backtracked.Shares in the maker of outdoor and indoor lighting products surged 24.7% to a 52-week high.Volume jumped sharply above average.And so far on Monday, the stock has scaled new heights with a 4.6% gain in late-hour trading.
The stock cleared a new double-bottom base with an 8.49 proper buy point .
Find 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 8.39 breakout point.
So, keep watching it for a potential new base to form , or a follow-on entry point to emerge.
LSI replaces Arko ( ARKO ), which had entered the IBD Stock Screener several weeks back with a superb IBD Composite Rating .
Shares on Wednesday broke out of a flat base with a proper buy point of 10.58, then reversed in ugly fashion after the Federal Reserve raised short-term interest rates by three quarters of 1 point for the fourth straight meeting.ARKO rose to as high as 10.79 before falling 1.7% to 10.15 at the close.Since then, the sell-off has worsened, and the stock triggered a key loss-cutting sell rule , which is to keep the maximum loss in every stock at 7% to 8% or less.
The Composite Rating has risen to a top-flight 99 but is now at 95.
Keep in mind that the Composite Rating serves as a research and stock selection tool, but not for timing buy or sell decisions.
Back to LSI, the stock is now closing in on a multiyear peak of 11.22 set in late January 2021.
Watch to see if the small cap pulls back near that price level, shows quiet action for at least a week or two, and then attempts another breakout.
Last week, the Cincinnati, Ohio, company reported a 92% surge in earnings to 25 cents a share, on top of a 63% climb in earnings in the year-ago quarter.
Sales rose 19% to $127.1 million, the smallest year-over-year increase in six quarters.LSI’s fiscal year ends in June.The Street sees fiscal 2023 profit rising 30% to 83 cents a share and up another 6% in FY 2024.
Nasdaq Stocks To Buy: Here Are 5 To Watch Right Now
Cheap Stock No.2
Enerplus ( ERF ), a small cap with a $4.5 billion market value, is a leader within IBD’s Canadian oil and gas exploration industry group.Its Composite Rating has jumped to 99, the highest possible.
Enerplus reported third-quarter results on Thursday.
On Friday, the stock gapped up in heavy volume and made new highs.ERF continued its torrid run Monday, gaining 2.6%.
Enerplus’ Q3 earnings soared 156% vs.
a year earlier to 87 cents a share on a 98% sales jump to $720.5 million.
The 98 Relative Strength Rating also looks great on a scale of 1 (worst) to 99 (best).This assesses ERF’s motion over the past 12 months.Its 3-month RS Rating has moved back up nicely to 95, according to MarketSmith .
ERF has also made further price progress after it retook the 50-day line, another bullish sign.
Back in late September, Enerplus finished a 4-1/2-month cup with handle .The handle’s highest price, 16.48, plus 10 cents, offered an actionable entry point once shares cross above 16.58.A breakout attempt in early October struggled.But a new handle formed and offered an extra buy point of 16.90.ERF is now extended, as it has topped the 5% buy range — up to 17.74 — from this new handle entry.
On Aug.4, the company reported a new batch of superb numbers.
Second-quarter earnings galloped 233% higher to 70 cents a share on a 238% leap in sales to $580.5 million.
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 is rebounding sharply lately; on Monday, shares shot 3.3% higher and closed above its 200-day moving average for the first time in nine months.
What Is The ‘Correct Buy Point’?
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.
5 Top-Notch NYSE Stocks To Buy And Watch Now
Stock No.3: Payments Industry Play
Paya ( PAYA ) (84 Composite Rating , 95 Relative Strength Rating ) closed Monday with a 5.4% gain in heavy, accelerating volume.The stock replaces Sensus Healthcare ( SRTS ), whose shares plunged 45% in massive turnover following third-quarter results on Thursday.
Paya had a rough time during the second half of 2021.It fell from a summer peak of 11.99 to a December low of 5.83, then undercut that low in early 2022.
Yet shares bottomed after reaching 4.51 in May, then rebounded to 7.68 by August.
The stock formed a new base over the next 11 weeks, then broke out past a 7.78 buy point.Shares have exited the 5% buy zone for now.
On Friday, the provider of payment systems for merchants posted a 125% jump in third-quarter profit to 9 cents a share, its best result in at least two years.
Sales rose 13% to $71.4 million, matching its Q2 increase.Analysts surveyed by FactSet see full-year earnings up 16% this year to 37 cents a share and up another 16% in 2023 to 43 cents.
Investor’s Corner: Seven Mental Tips To Help You Beat The Stock Market
Cheap Stocks To Buy: 4th Idea
Brazil financial app operator Inter & Co.( INTR ), featured for the first time here nearly a month ago, has failed to recover after sliding beneath its 50-day moving average.In its place? SurgePays ( SURG ) of Bartlett, Tenn.
On the negative side, SurgePays’ https://www.investors.com/how-to-invest/investors-corner/how-to-research-growth-stocks/ is so so at 68 on a scale of 1 to 99 and has fallen from 72 in recent days.Normally, this story selects stocks with a Composite score of 90 or higher.Yet SURG is building a cup base that showed a 7.40 proper buy point for now.
A sharp 96 https://www.investors.com/how-to-invest/investors-corner/what-is-relative-strength/ counters a dismal 54 EPS Rating .SurgePays is expected to post Q3 results around Nov.16.
Until recently, the cup pattern features no handle .But after sinking for four of the past six sessions, SURG has now latched a handle , representing a shakeout of uncommitted shareholders, on the cup.
Thus, a new entry point of 6.25, or a dime above the handle’s intraday high.However, the quality of the handle is not great.
Notice in recent days that SurgePays has rallied sharply and climbed back above its 50-day moving average after spending roughly seven weeks beneath this quintessential technical level of support and resistance.
The company provides a software platform that mainly processes third-party activations for prepaid cell phones.The platform also handles prepaid cell phone account balance top-ups, gift card activations and wireless SIM activations.The company also seeks to act as an “innovative supply-chain marketplace for convenience store, bodega and tienda owners” by offering top selling products at a deeper wholesale discount than traditional distribution chains.
SurgePays does not make money yet.However, sales rocketed 146% to $28 million vs.
a year earlier in the second quarter of this year.
That marks a fourth quarter in a row of top-line growth acceleration.
What does this mean? The pace of growth in sales is quickening from quarter to quarter.Hence, SURG makes the “Accelerating Sales” section of the IBD Screener for top stocks trading under 10 a share .
In the second quarter of 2021, SurgePays’ sales wilted 22% to $11.4 million.
However, since then, quarterly sales have lifted 14%, 25%, 92% and most recently 146%.This track record marks four straight quarters of year-over-year sales acceleration.
The weekly chart also highlights a strong run-up since SURG bottomed near 1.8 in January.The stock has managed to carve out a nice series of higher highs and higher lows.
Yet keep in mind that with the market in bear-market correction mode, all new buys carry extraordinarily high risk of failure.
Wall Street thinks SurgePays can earn 91 cents a share this year, however, even after the company lost 10 cents a share in the first quarter and 12 cents in Q2.Analysts also see earnings soaring 165% in 2023 to $2.41 a share.
SurgePays has 12.4 million shares outstanding, a float of 7.4 million, and a market value of $75 million.
The long-term debt to equity ratio of 28% in 2021 is reasonable.
Investor’s Corner: What Is Relative Strength?
Cheap Stocks To Watch And Buy: No.5
Replacing Genfit ( GNFT ) recently: DecisionPoint Systems ( DPSI ).The Amex-listed enterprise software firm blasted 13.6% higher on Tuesday in heavy volume.
Amid heavy market volatility, DecisionPoint (85 Composite, 78 EPS, 89 RS) waged a fourth straight weekly gain last week.
And in every up week, volume jumped above the stock’s 10-week moving average.So, this action hinted at solid institutional demand for shares.
Also, please see on a daily chart how DPSI has been holding up during sell-offs that sent shares briefly below the rising 50-day moving average .That’s bullish.
Trading has tightened up, indicating holders are less willing to sell their shares.
The month of May showed some really wild action.At one point, following first-quarter results, DecisionPoint hit a new high of 12.98, then reversed badly.
Clearly, some folks were selling into strength.Shares then dropped hard, undercutting the 4 price level, but bottomed out in July.
At this point, watch for the stock to test the 8 level and perhaps make one more pullback, ideally in light volume.
This shakeout may sculpt a cup with handle in DecisionPoint.Read more about how an excellent cup with handle can produce magnificent profits in a timely manner.Keep in mind there are well-built cup-with-handle patterns and terrible ones.
The company’s mobile platform helps clients integrate their data and services efficiently.Earnings dove to 5 cents a share in 2021.
However, analysts think the bottom line will rebound 380% this year to 24 cents a share.
In the fourth quarter of 2021, earnings shrank 50% to 4 cents a share on a 10% contraction in the top line.
Yet in the past two quarters, DecisionPoint’s profit soared 433% and 233% vs.year-ago levels to 16 cents and 10 cents a share, respectively.Sales jumped 23% and 81% over the same time frame.
Meanwhile, DPSI’s enterprise software industry group recently climbed to 75th among 197 industry groups in terms of six-month relative price performance.
Not bad, but there’s room for improvement.Check the industry group ranking at IBD Data Tables .
IBD research has found that up to 50% of a brilliant growth stock’s run can be attributed to the strength of its industry group and the strength of its broad industry sector.
Please check out the IBD stock research tables at IBD Data Tables to see the current rankings of 33 broad sectors .
Want To Find The Best Cheap Stocks On Your Own? Please Check Out IBD Stock Screener
8 More Cheap Stocks That Deserve A Good Look
It may also behoove traders to keep a close eye on Dallas-based oil and gas producer Berry ( BRY ), refrigerant decontamination and reclamation firm Hudson Technologies ( HDSN ), Quest Resources ( QRHC ) and Brazilian steelmaker Gerdau ( GGB ).
Berry and Hudson ranking among the stocks trading under 10 a share and owning top Composite ratings.Quest and Gerdau have made the “Fastest Growing EPS” section of IBD Stock Screener among stocks trading under 10 a share.Both issues have made stunning moves since the start of the third quarter.
Gerdau rallied more than 6% over Monday and Tuesday’s trading following news that Luiz Inacio Lula da Silva defeated incumbent Jair Bolsonaro to reclaim the Brazilian presidency.
GGB has jumped 11% for the week in Friday afternoon trading, and looks poised to finish above its long-term 200-day moving average.As seen in the daily chart above, Gerdau hopped back above its 50-day line on Oct.3, a bullish change in character.
Also making this sub-list? Epsilon Energy ( EPSN ), aerospace firm Innovative Solutions & Support ( ISSC ) and StealthGas ( GASS ).
Amex-listed Flexible Solutions International ( FSI ) makes the list of stocks priced under 10 and holding top EPS Ratings.FSI rocketed 95% in three straight days of gains from Oct.
3 to 5.Since then, the pullback has been mild and in lighter turnover, a plus.
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
YOU MIGHT ALSO LIKE:
This Could Be Your No.1 Sell Rule
Trade With Success: The Latest Inside Investor’s Corner
Should You Buy Airbnb Stock Today?
Where Is The Stock Market Headed? Read This Column Each Day.
