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.
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 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. Shares reversed lower but are now trying to jump back above a key technical level, the 50-day moving average. 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?
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 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.
Cheap Stocks To Buy: Biotech Breaks Out
Ardelyx (ARDX), a member of IBD’s biotech industry group, shot out of a new base on March 3 after reporting astounding results. Shares have now gotten extended.
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, in reaction to the excellent results, ARDX surged past a correct buy point of 3.44, a penny above the left-side peak of the six-week amorphous pattern. However, amid a last week’s rough sledding for stocks, ARDX slid 6.8% in accelerating turnover to 3.56 last week. But shares rebounded more than 4% for a second straight session Tuesday.
In fact, on Tuesday, ARDX stock climbed into the 20% to 25% profit zone from the 3.44 entry. Selling at least some of the position on the way up is a savvy way to lock in gains near the peak in the short run.
The small cap’s market value has now topped $850 million. Average daily volume is heavy at 7.9 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 one point, ARDX shares sailed easily 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.
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.
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: Luna’s Breakout Fails
Luna Innovations (LUNA) replaced Paya (PAYA), which blasted 24% higher on Jan. 9 on news it’s getting acquired. The stock broke out of a new base at 10.55 in early March. However, Luna Innovations has cratered after it posted earnings of 8 cents in the fourth quarter, unchanged vs. a year earlier, even as revenue rose 31% to $31.7 million.
Luna will get replaced soon.
The stock had shown a stellar Relative Strength Rating of 97 prior to the recent plunge. But action had been wild in the first part of March, a bearish sign.
For instance, shares fell in four of the past five sessions through March 13. As a result, Luna fell more than 7% below the new entry of 10.55, forcing new buyers to follow the golden rule of investing: keep losses small, ideally at 7%-8% or less.
Three weeks ago, Luna Innovations got placed on 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.
Within the new base, a 19% correction off the latest high of 10.45 high is mild. But LUNA stock also saw some heavy whipsawing action, a negative sign that hinted views were mixed among investors. It eventually triggered IBD’s signature sell rule: cut losses short, ideally at 7% or less.
As the weekly chart shows, the Roanoke, Va., maker of sensing, test and measurement tools for fiber optic equipment had made a blistering run since bottoming near 4 in October.
Prior Breakout Succeeds
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.
Before the new breakout attempt, the stock moved sideways and enjoyed buying 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 prior 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 grew 79%, 32%, 26%, 7%, 19% and 43% vs. year-ago levels in the prior 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 35% of 33 million shares outstanding, according to MarketSmith data.
Stock No. 3: Extended, Yet Still Worth Watching
LSI Industries (LYTS) continues to excel. However, the stock felt the market’s selling heat last week and fell 10% in heavy volume. Shares also undercut the 50-day moving average for the first time in more than four months.
On the weekly chart, LSI Industries clipped its 10-week moving average as volume jumped 36% above average levels.
A continued decline, especially in heavy turnover, could trigger a defense-type sell rule in LYTS stock.
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. The stock also hosts a 12-month 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.
Cheap Stocks To Buy: 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).
Yet BBCP shares have tanked, falling 7.6% in rising turnover after reporting fiscal first-quarter results. Shares fell eight days in a row and took out the 50-day moving average, a key technical level.
While the stock is appearing to find buyers near the long-term 200-day moving average, BBCP will also be shown the door soon.
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.
On March 9, Concrete Pumping posted a huge jump in earnings in the January-ended quarter to 11 cents a share vs. a penny in the year-ago period. Sales rose 10% to $93.6 million, the smallest increase in five quarters.
In the prior four quarters, Concrete Pumping’s top line rose 21%, 26%, 29% and 31% vs. year-ago levels.
Wall Street has responded by boosting profit forecasts. Analysts surveyed by FactSet now see earnings in the October-ended fiscal year rising 17% to 56 cents a share and fiscal 2024 earnings up 18% to 66 cents.
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 trying to break out again.
Watch The RS Line Too
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 moved back up to a healthy 97 but has drooped to an 87. The Relative Strength Rating rebounded to as high as 89 in recent days, 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 briefly topped $425 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.
Candidate No. 5: Restaurant Chain Sets Up
Arcos Dorados (ARCO) has joined the IBD Screener as a top Composite Rating scorer among companies trading under 10 a share. The stock is failing to rebound and is making a new pullback.
Continued weakness would result in a replacement for Arcos in this column.
Last week, Arcos reported an 18% jump in Q4 profit to 26 cents a share as revenue expanded 31% to $1.02 billion. But the post-earnings reaction has been unsavory.
The RS Rating of 67, based on 12 months of price action, is down sharply from 87 just a week earlier. And the 3-month Relative Strength Rating is even less appealing at 43, according to MarketSmith.
The company operates and franchises more than 2,200 McDonald’s restaurants across Latin America and the Caribbean.
In early January, Arcos Dorados broke 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. At 7.86, ARCO is now trading sharply 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, fell to a B- on a scale of A to E. An Accumulation grade of C marks a neutral level of buying vs. selling among fund managers.
More Cheap Stocks To Watch And Buy
Heritage Global (HGBL), event-organizing platform Eventbrite (EB), biotechs Aravive (ARAV) and NuCana (NCNA), 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. Eneti is trying to rebound after falling further the 50-day line. Heritage is trying to clear resistance near 2.90.
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.
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.
YOU MIGHT ALSO LIKE: