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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 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? 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 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.
Solid, expanding institutional buying 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 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, IBD Sector Leaders, 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. So, how about now? 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 in mid-November; since then, shares have sunk as much as 84% 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 the week ended April 1, TDOC stock lived well beneath its key 10-week moving average, a bearish sign. Plus, Teladoc, still down more than 60% below its all-time peak of 308, is struggling to bottom out and build a new base.
So, can you employ the CAN SLIM strategy for cheap stocks to buy as well?
IBD Big Picture: Clues That Reveal A Coming Bear Market
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: Idea No. 1
Stock No. 1, screening for top IBD Composite Rating: SunCoke Energy (SXC). The member of IBD’s coal industry group has formed a long base best described as an eight-month consolidation pattern.
Notice on a daily chart how the stock showed little trouble surpassing upside resistance at 8.
Among cheap stocks to buy, the small cap (its market value tops $750 million) has gained as much as 49% so far in 2022. A 96 Composite Rating shines brightly, and the Relative Strength Rating of 95 deserves high respect.
This strong move past 8.13, and in robust volume, constituted a breakout and a timely buy opportunity.
Shares quickly got extended past the 5% buy zone, which went up to 8.54. A pullback in crude oil futures triggered profit-taking in energy stocks. But SXC, after trading back in the proper buy zone, has gotten extended again.
So at this point, watch for either a rebound off the 10-week moving average or a new base to form. The first and second pullback to the 10-week line can generate a follow-on buy opportunity. And a new base may set up another breakout to new 52-week or all-time highs.
Suncoke now trades almost 1 million shares on average each day over the past 50 sessions.
The stock’s relative strength line broke a flagging trend in January and has bolted to new highs, another bullish sign.
The Lisle, Ill., company produces coke for the steel industry through mines in both the U.S. and Vitoria, Brazil. SunCoke achieved operating cash flow of $233 million in 2021, exceeding its own revised forecast of $209 million-$224 million. Fourth quarter sales of $365 million grew 18%, and the company turned a profit of 15 cents a share vs. a net loss of 6 cents in Q4 2020.
Management shared full-year guidance of 4.1 million tons of domestic coke total production; capital expenditures of $80 million; and operating cash flow of $190 million-$205 million.
Cheap Stocks To Buy: Numero Dos
ICL Group (ICL) belongs to IBD’s agricultural chemicals group. The large cap ($15 billion market value, 1.28 billion shares outstanding) and specialty minerals firm has made a strong run since the fourth quarter of 2020.
In the week ended Jan. 28, ICL slashed through the 10-week moving average in the heaviest weekly turnover for a down week in nearly two years.
Such negative action provoked a key IBD defense sell rule. So, this stock may get replaced. However, ICL has scored an impressive rebound and retaken its 10-week moving average.
ICL hosts a top-drawer 99 Composite Rating and a superb 98 Relative Strength Rating.
Since the mid-February rally marks the third rebound off the 10-week line since the initial breakout, it does not serve as a follow-on entry.
Instead, focus on the first or second rebounds off the 10-week moving average.
ICL recently formed a shallow and narrow cup pattern. Normally, a good cup base stretches a minimum six weeks long, or 30 trading days on a daily chart. So ICL’s base fails in that regard. Still, a new buy point has emerged at 11.26. And the stock has retaken that prior entry with gusto and gotten extended past the 5% buy zone.
In late 2021, ICL replaced Charles & Colvard (CTHR), an expert in lab-produced gemstones. The stock had been forming a long base that could correctly be called a consolidation pattern. Until recently, the proper buy point stood at 3.40, a dime above a near-term high of 3.30 set on Sept. 2. But shares have plunged through the 200-day line.
The plunge by CTHR in recent months reaffirms IBD’s golden rule of investing.
Cheap Stock No. 3
Stock No. 3, screening for top IBD Composite Rating: Enerplus (ERF). The small cap with a $3.4 billion market value has emerged as a new leader within IBD’s Canadian oil and gas exploration industry group.
The company reported Q4 results on Feb. 25. Profit soared 614% to 50 cents a share on a 92% revenue increase to $302 million. Shares are currently extended past any proper buy point.
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.
Last year, ERF formed a 13-week cup base with a 7.64 proper buy point from July to September, then broke out beautifully in the week ended Oct. 1. That week saw shares soar 11.6% to new 52-week highs.
The 5% buy zone from that 7.64 entry went up to 8.02. The Calgary-based company then went on an eight-week win streak.
In December, Enerplus staged a bullish test of support at the 10-week moving average. A strong bounce off this technical level often offers a secondary entry point. On Dec. 6, ERF acted bullishly, rising nearly 4% and hopping off its 10-week line at 9.43. Again, the first two rallies off the 10-week moving average, following a strong breakout, offer ideal follow-on entry points.
At this point, it may wise to stay patient and watch for a new correction to trigger the formation of a new base.
The Composite Rating in Enerplus offers a divine 98 score on a scale of 1 (wizened) to 99 (wizardly). The Relative Strength Rating also scores highly at 98.
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.
Investor’s Corner: Seven Mental Tips To Help You Beat The Stock Market
Idea No. 4
Stock No. 4, screening for top IBD Composite Rating: Huttig Building Products (HBP). The St. Louis-based company has rallied magnificently since testing support at the long-term 40-week moving average near 5 in early October. Shares catapulted out of its neighbor cup base at 7.55, then sprinted to new highs.
In January, HBP and building-related stocks have struggled as higher interest rates may increase concern about the pace of future demand in the residential construction market. HBP recently undercut the 10-week moving average. But a new base continues to form; a new proper entry point emerged at 11.45.
However, Huttig announced in late March that it is getting acquired by Woodgrain Inc. So, HBP will get replaced in this column.
Huttig replaced Wipro (WIT); the India-based IT services firm continues to struggle after taking out its 10-week moving average in January.
Want To Find The Best Cheap Stocks On Your Own? Please Check Out IBD Stock Screener
Cheap Stocks to Buy, No. 5: A New Oil Leader
Stock No. 5, Screening for Fastest Growing Earnings Per Share: Evolution Petroleum (EPM) (99 Composite, 97 RS). The Houston-based developer of oil and gas in Texas and Oklahoma finished the eighth week of building the right side of its own deep cup pattern. Shares then broke out past a 6.84 buy point on Feb. 14.
Keep in mind that a handle also formed on the current cup base; 6.26 emerged as a lower entry. On Feb. 11, shares surged 8% and moved out of the 5% buy range from this lower buy point.
A New Buy Point?
A new follow-on entry point has emerged, however, as the stock tries to rebound off the 10-week moving average, now at 6.86.
For rebounds off the 10-week line, IBD’s general stance is that it’s buyable until it rises 10% above the moving average. Yet, to reduce downside risk, these follow-on purchases work best as close to the intermediate-term support level as possible.
Evolution Petroleum, with a $242 million market value, falls easily within the small-cap end of the stock market. It has 33.7 million shares outstanding, a float — or freely traded shares — of 30.7 million, and an average daily volume of 237,000 shares.
Evolution replaced United Microelectronics (UMC), which had held a spot on this column for quite a long time. United Micro crashed in the final week of January, down 14% in the heaviest volume in at least five years. The stock also took out its 200-day moving average, another key sell signal.
The Composite Rating in EPM is outstanding at 99. A Relative Strength Rating of 98 rocks.
Evolution has seen its SMR Rating rise to B on a scale of A to E. The SMR measures sales, margins and return on equity. However, after a long dry spell of growth, the top line jumped 309% vs. year-ago levels in the second quarter of 2021 and surged 237% in Q3 2021.
The micro cap posted solid earnings in four of the past five quarters.
Wall Street sees Evolution’s earnings surging to 92 cents a share in the fiscal year ending in June this year, up from 6 cents in FY 2021.
What Does An Excellent Cup With Handle Look Like? Learn Right Here
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.
Even among cheap stocks that you look to buy.
Please follow Chung on Twitter: @saitochung and @IBD_DChung
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