Bull market, bear market, or trend-less market? Regardless of what stage 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 even from $5 to $15, may prove irresistible.
Are there any unique problems or subtle challenges with this strategy of hunting cheap stocks to buy? Yes. Let’s consider a few.
Hundreds of stocks trade at a “low” price on both the Nasdaq and the NYSE. So, how can you pick the winners consistently?
Here’s another problem: 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 has been trading a dollar a share. If it has thin trading volume, the portfolio manager will have an awfully tough time accumulating shares without making a big impact on the stock price.
Solid, increasing institutional buying makes up the I in CAN SLIM, IBD’s seven-factor paradigm of successful investing in growth stocks.
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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 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, 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.
Teladoc roared past an 86.40 proper buy point in mid-January 2020. Seven months later, the stock hit 253, up 193%.
Leaderboard member Adobe (ADBE) cleared a 157.99 entry in a five-week flat base in the week ended Oct. 20, 2017. The megacap tech marked a new high of 536 in early September 2020 before cooling off. And the video editing, document management, and data analytics software giant recently staged another new breakout.
Still, can you employ the CAN SLIM strategy for cheap stocks to buy as well?
5 Cheap Stocks To Watch And Buy
The IBD Stock Screener filters 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.
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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 Rating: Wipro (WIT). The India-based IT consultant has made a superb run-up since bottoming at 2.52 at the low of the coronavirus market crash in March 2020. Shares are forming a flat base that highlights an 8.42 proper buy point. The Composite Rating is 98. WIT also stands out with a 98 Relative Strength Rating.
A 98 RS Rating means Wipro has outrun 98% of all companies in the IBD database over the past 12 months.
Stock No. 2, screening for top IBD Composite Rating: Entravision Communications (EVC). The Santa Monica-based Spanish language media firm owns TV stations and FM and AM radio stations across nine states. The stock broke out of a 4.52 entry point in surging volume during the week ended May 21. Now, the stock is facing its first test of buying support at the 10-week moving average. Ratings are spectacular: 96 Composite, 98 RS, an up/down volume ratio of 2.3, B+ for Accumulation/Distribution. The dividend payer boasts a 1.8% annualized yield.
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Stock No. 3, screening for top Composite Rating: Loma Negra (LOMA). The Argentine cement, concrete, aggregates and lime supplier posted a 500% jump in first-quarter earnings vs. a year earlier to 24 cents a share. Sales accelerated to a 37% gain to $143 million, according to MarketSmith. The relative strength line bolted to new 52-week highs recently. Loma Negra is close to going back into the 5% buy zone after clearing a base-on-base pattern at 6.79. The buy zone goes up to 7.13.
Stock No. 4, screening for top Relative Strength Rating: Chico’s FAS (CHS). The former leader of IBD’s retail apparel and shoes industry group is making its first test of the 10-week line after clearing a cup base at 4.22. The first and second rallies off the 10-week line after a strong breakout pose as secondary entry points. Chico’s sports a top-drawer 99 RS Rating. At least eight quarters in a row of net losses weigh down the 74 Composite Rating. But sales rebounded 38% in the April-ended fiscal first quarter to $388 million.
Stock No. 5, screening for Fastest Growing Earnings Per Share: United Microelectronics (UMC). The Taiwan-based integrated circuit maker has risen nearly fourfold after a July 2020 breakout around 3. A new base is forming; an early entry point at 9.92 has emerged for now. United’s earnings per share grew 50%, 350%, 225%, 167% and 400% vs. year-ago levels in the past five quarters on sales increases of 32%, 30%, 28%, 15% and 19%. Solid ratings for Composite (94), RS (94) are positive. It also boasts a best-possible A grade for the SMR Rating, which measures sales, margins and return on equity.
Please follow Chung on Twitter: @saitochung and @IBD_DChung
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