Bull market, bear market or trendless market? No matter what stage we are in, some people never tire of looking for cheap stocks to buy.
And who doesn’t love a bargain? After all, the temptation to find a stock that triples from $1 to $3 a share, or even $5 to $15, can prove irresistible.
Are there any unique issues or subtle challenges with this cheap stock-to-buy strategy? Yes. Let’s take a look at a few.
Hundreds of stocks are trading at a “low” price on both the Nasdaq and the NYSE. So, how can you consistently pick the winners?
Here’s another problem: IBD research consistently finds that dozens, if not hundreds, of great stocks don’t start out as penny stocks every year. Most institutional money managers don’t touch cheap stocks. Imagine a large-cap mutual fund trying to buy a meaningful share in a stock that has traded a dollar a share. If it has a small trading volume, the portfolio manager will have a very hard time collecting stocks without having a big impact on the stock price.
Solid, increasing institutional purchases make up the I in CAN SLIM, IBD’s seven-factor paradigm for successful investing in growth stocks.
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Another cold, hard truth that pennystock advocates won’t tell you? Many low-priced stocks stay low for a very long time.
So if your hard-earned money is stuck in a 50 cent stock that isn’t generating meaningful capital appreciation, you may not be dealing with a losing stock alone. You will also have to deal with the missed opportunity to invest in a real stock market leader in Leaderboard or a member of the IBD 50, the long-term leaders, or IBD Big Cap 20.
Let us think Zoom video (ZM) and pioneer of telemedicine Teladoc (TDOC) in 2020, after the coronavirus bear market ended. These two and many others traded at an “expensive” price as they hit new 52-week highs and started beautiful rallies. But the quality of their business, accelerated growth in fundamentals and significant purchases by top-rated mutual funds confirmed that the prices of their premium stocks demonstrated a high level of quality.
Zoom Video, after clearing a deep cup base at 107.44 in February 2020, rose nearly sixfold to its 2020 peak at 588.
Teladoc roared past an 86.40 true buy point in mid-January 2020. Seven months later, the stock reached 253, a 193% increase.
Leaderboard Member Adobe (ADBE) hit an entry of 157.99 in a five-week flat base in the week ended October 20, 2017. The megacap technology marked a new high of 536 in early September 2020 before cooling. And the video editing, document management and data analytics software giant recently staged yet another outbreak.
But can you also use the CAN SLIM strategy to buy cheap stocks?
5 cheap stocks to watch and buy
The IBD Stock Screener filters stocks that don’t just trade for $10 or less per share. Some also have many of the key fundamental, technical, and fund-holding quality characteristics routinely seen among the biggest stock market winners.
Keep in mind that liquidity is often meager. So you may not get trade executions at an ideal price. If fund managers dump stocks all at once to lock in profits, you could incur further losses when you exit the stock.
So check the gap between the best offer of a cheap stock and the best offer, or the difference between what one investor is willing to pay and another who 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.
Stock No. 1, Screening for Top IBD Composite Review: wipro (WHITE). The India-based IT consultant has made an excellent run since hitting a low of 2.52 at the trough of the March 2020 coronavirus market crash. Shares are flat, highlighting a good buy point of 8.42. The Composite Rating is 98. WHITE also stands out with a 98 Relative Strength Rating.
A 98 RS Rating means that Wipro has surpassed 98% of all companies in the IBD database in the past 12 months.
Stock No. 2, Screening for Best IBD Composite Assessment: Entravision Communication (EVC). The Santa Monica-based Hispanic media company owns TV stations and FM and AM radio stations in nine states. The stock broke from a 4.52 entry point in rising volume in the week ended May 21. Now the stock is facing the first test of buying support at the 10-week moving average. The ratings are spectacular: 96 composite, 98 RS, up/down volume ratio of 2.3, B+ for accumulation/distribution. The dividend payer can boast an annualized return of 1.8%.
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Stock No. 3, Screening For Top Composite Rating: Black Hill (LOMA). The Argentine supplier of cement, concrete, aggregates and lime posted a 500% increase in profits in the first quarter from a year earlier to 24 cents per share. Sales accelerated to a 37% profit to $143 million, according to MarketSmith. The relative strength line recently shot to new 52-week highs. Loma Negra is close to a return to the 5% buying zone after a base-to-base pattern of 6.79. The buy zone goes until 7.13.
Stock No. 4, Screening for Highest Relative Strength Rating: Chico’s FAO (CHS). The former leader of IBD’s retail apparel and footwear industry group makes his first test of the 10-week line after clearing a cup base at 4.22. The first and second rallies of the 10-week line after a strong breakout form as secondary entry points. Chico’s has a top class 99 RS Rating. At least eight consecutive quarters of net losses weigh on the 74 Composite Rating. But revenue rose 38% in the fiscal first quarter ended April to $388 million.
Stock No. 5, Screening for Fastest Growing Earnings Per Share: United Microelectronics (UMC). The Taiwan-based integrated circuit manufacturer has nearly quadrupled after a breakout in July 2020 around 3rd. New base is being formed; an early entry point at 9.92 has emerged for the time being. United’s earnings per share grew 50%, 350%, 225%, 167% and 400% from year-ago levels in the past five quarters, thanks to revenue increases of 32%, 30%, 28%, 15% and 19%. Solid reviews for Composite (94), RS (94) are positive. It also has a best possible A score for the SMR rating, which measures revenue, margins and return on equity.
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