Bull market or bear market? Or perhaps a 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, does sound 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 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.
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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 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 standout in 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, supercharged growth in sales and earnings, and significant buying by top-rated mutual funds affirmed a premium in their share prices.
After clearing a deep cup base at 107.44 in February 2020, Zoom rose nearly six-fold to its 2020 peak at 588.
Now? Zoom stock is working on a new base and still trying to bottom out. Trading near 69, Zoom is up mildly so far in 2023.
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%, 5% and 4% in the past seven 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, -5% in Q4).
So, can you employ the CAN SLIM strategy for cheap stocks to buy as well?
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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 boatloads of shares to book 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.
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Cheap Stocks To Buy, No. 1: Brand New IPO
ARB IOT Group (ARBB) debuted on the Nasdaq three weeks ago at $4 a share. The stock finished Friday with its third straight weekly gain. Shares rallied 7.4% to 4.65 and made new highs.
The stock has yet to form a true IPO base. So, no new buy point has emerged for now.
According to this Investor’s Corner, a good IPO base can form in as few as seven sessions. Through Friday, ARBB has traded just 12 days.
The Kuala Lumpur, Malaysia-based company serves clients in the Internet of Things (IOT) market. It assists clients from the concept phase all the way to product deployment. This story will add more detail about its business. In the meantime, big earnings and revenue growth over the past few years help back up its solid Composite Rating of 98.
The RS Rating of 95 also stands out. But keep in mind that the Relative Strength Rating generally covers 12 months’ worth of price action vs. all other companies in the IBD database.
According to MarketSmith, ARB IOT reports results on a six-month basis. During the second half of 2021, the company posted earnings of 22 cents a share on a 342% leap in sales to $41.2 million. In the first half of 2022, ARB IOT reported earnings of 42 cents a share, up 144% over the same six-month period a year earlier. Sales soared to $71.6 million vs. $3.2 million.
Excluding the market debut on April 5, the stock trades roughly 175,000 shares per day. ARBB has 26.5 million shares outstanding, a float of just 1.1 million shares, and a market value of $123 million.
For now, no data regarding analysts’ top and bottom-line estimates appear on Yahoo Finance.
Cheap Stocks To Buy: No. 2
Thinly traded AudioEye (AEYE) joined this column in the final week of March. On March 30, AEYE briefly cleared a roughly seven-week cup-like base with a 7.47 proper buy point. The stock reversed lower the next day after notching a 52-week high. Shares still rocketed 22% higher for the week in accelerating volume.
The stock continues to pull back in a measured way. Chart action highlights signs of buying support.
For instance, on April 10, AudioEye bolted 11.4% higher in a solid test of key support at the 50-day moving average. Finishing the week ended April 21 down 2.4%, AEYE nevertheless is sharply beating the market, up 69% for the year so far.
If the breakout succeeds, AudioEye should coast past the 5% buy zone, which goes from 7.47 up to 7.84.
Also, notice on a weekly chart how the stock found buyers near both the 10-week and 40-week moving averages in recent weeks. That’s bullish. However, for now it appears the stock may form a new base.
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The Tucson, Ariz., firm calls itself as a “web accessibility platform for businesses of all sizes” and says it’s No. 1 in web accessibility. The company’s platform helps clients integrate with a number of popular software and ecommerce platforms, ranging from Google Tag Manager to Hubspot to Shopify, from Squarespace to Wix to Word Press.
AudioEye has yet to post an annual profit. However, the company posted earnings of a penny per share in both the third and fourth quarters of last year. Sales have risen 14% to 36% vs. year-ago levels in the past eight quarters. On average, the top line jumped 21% over this time frame. Total 12-month sales have grown to almost $30 million.
AEYE is truly a micro cap; it trades less than 30,000 shares per day. So please take account the liquidity risk. On average, less than $200,000 worth of stock gets traded each day. Compare that with Travelers (TRV) in the Dow Jones Industrial Average; it trades 1.52 million shares each day, or more than $270 million in dollar volume on average.
According to MarketSmith data, just 24 mutual funds own a piece of AudioEye stock. Management owns 39% of the company’s 11.7 million shares outstanding. AudioEye’s market value has crossed past $80 million. It made IBD Stock Screener for Top Composite Rating stocks trading under 10 a share.
A few weeks ago, the stock sported a 92 IBD Composite Rating on a scale of 1 to 99. It’s now 90. AEYE stock also boasts a 12-month Relative Strength Rating of 96. Meanwhile, the relative strength line has risen to a six-month high. This means AudioEye has been outperforming the S&P 500.
The company is expected to report first-quarter results on May 17.
Want To Find The Best Cheap Stocks On Your Own? Check Out IBD Stock Screener
Cheap Stocks To Buy: Biotech Breakout Thrives
Ardelyx (ARDX), a member of IBD’s biotech industry group, shot out of a new base on March 3 after reporting astounding results. Shares continue to make upward progress and have gotten extended. Put simply, now is not the time to chase the stock higher.
Ardelyx hit new highs and rose 4.5% on Monday. It’s holding those gains just fine.
ARDX finished a big week for the stock market with a 19.7% lift in the week ended March 31. On Tuesday, shares snapped a five-day losing streak, jumping 8% in accelerating turnover. At 4.92, Ardelyx has raised its year-to-date gain to 73%.
An early April drop looked normal, and came in lighter volume amid the Good Friday holiday-shortened week. Recently, shares have enjoyed buying support at a key short-term technical level, the 21-day exponential moving average. IBD research on big stock market winners finds that they tend to bounce bullishly off the 21-day during pullbacks immediately after breaking out.
All in all, the five-session pullback looked quite normal. ARDX hosts a top-notch 99 Relative Strength Rating. The Composite Rating improved to 98, which is stout.
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.
During a rough week of sledding for cheap stocks and higher-priced issues, ARDX slid 6.8% in accelerating turnover to 3.56 on March 10. But shares rebounded in solid form.
In fact, ARDX stock has climbed into the 20% to 25% profit zone from the 3.44 entry several times in the past few weeks. 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 topped $1 billion. Average daily volume is heavy at 7.6 million shares.
How To Spot The Buy Point
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 had traded at 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 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.
Another potential entry point, but still a long ways away? A test of support at the stock’s rising 10-week moving average.
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., firm develops small molecules that could potentially become therapies for heart, kidney and digestive system ailments. 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. It 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 21 cents a share, down from 33 cents, and turning a profit of 33 cents in 2024, up from 15 cents.
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 has improved to a 69th ranking 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.
Ardelyx is slated to post first-quarter results on May 9.
Cheap Stocks To Buy, Numero Cuatro
Luna Innovations (LUNA) replaced Paya (PAYA), which made this column before it blasted 24% higher on Jan. 9 on news it’s getting acquired. Luna shares broke out of a new base at 10.55 in early March. However, Luna cratered after notching earnings of 8 cents in the fourth quarter, unchanged vs. a year earlier. Sales rose 31% to $31.7 million.
Therefore, Luna is out and makes room for Betterware de Mexico (BWMX), which has rebounded. At 11.89, the stock has boosted its 2023 gain to 85%.
Shares of the thinly traded company have also rallied nicely after securing buying support at the rising 50-day moving average last month. In the week ended March 31, the stock outperformed the S&P 500 and the Nasdaq with a 14.9% weekly gain in heavy turnover.
BWMX is showing support at the 21-day exponential moving average. The rebound in recent days is encouraging.
Mexican stocks have thrived so far this year. For instance, iShares MSCI Mexico (EWW) is trying to break through upside resistance near 60. So far, the exchange traded fund has gained 22% year to date.
BWMX trades just 43,000 shares a day. On IBD Live, guest panelist and three time U.S. Investing Championship winner David Ryan and other professional portfolio managers advise limiting a position in a stock to no more than 3%-5% of its average daily volume.
Betterware sells housewares and home cleaning products. Sales have turned from a 34% drop in the first quarter of 2022 to year-over-year gains of 24%, 37% and 56%.
In the fourth quarter, Betterware’s profit rose 15% to 29 cents a share, ending a three-quarter slump.
According to MarketSmith, analysts think the company will earn $25.86 a share this year and $30.04 a share in 2024. These figures may need further investigation since Betterware posted a net profit of 42 cents a share in 2020, $2.38 in 2021 and $1.01 in 2022.
The 93 RS Rating is sound and rising. It offsets a dull 73 Composite Rating.
At this point, the stock may need more time to set up a good base and a proper buy point. Yet for now, 12.49 may serve as a standard buy point in a long first-stage cup with handle.
Also, a narrow trendline could be drawn from the year-to-date peak of 12.39 and through the 11.46 near-term high. This trendline produced an aggressive entry point near 10.70.
Betterware is now slated to report Q1 results on April 27.
The number of mutual funds owning a piece of the small cap has dwindled to 10 at the end of 2022 vs. a two-year peak of 28 funds in both the second and third quarters of 2021. Ownership should rise, not fall.
Please read all about the I in CAN SLIM, which stands for healthy and increasing institutional sponsorship, a critical factor for determining the true market leaders.
How To Find The Best Cheap Stocks: IBD Stock Screener
Extended, Yet Still Worth Watching
LSI Industries (LYTS) continues to excel since the summer of last year. However, the stock felt the market’s selling heat on March 10, falling 10% in heavy volume. Shares also undercut the 50-day moving average for the first time in more than four months.
Clearly, a new base is now in the works. Several weeks of trading below the 10-week moving average is not an issue. But an extended period of time, in the 8-to-9-week range or longer, would be.
As seen 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.
In late February, the stock cracked through the 15 price level for the first time since early 2008. Lately, it’s certainly getting serious 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 in January to February resembled 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. However, the market’s rising volatility threw cold water on the breakout attempt. Indeed, the pattern revealed a wedging look, rather than pure sideways, tight action.
In the week ended Jan. 27, LSI shares propelled 12% higher in massive turnover on the back of another robust quarterly report.
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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 a high degree of profit taking by institutional investors. Why? It’s notched no fewer than four down days in above-average volume since March 10. The March 13 decline did not do much damage, though. That session appeared to highlight fund managers coming in to shore up the stock.
LYTS sports a 98 IBD Composite Rating on a scale of 1 to 99. The stock also hosts a 12-month Relative Strength Rating of 98, which is also excellent. 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 the first quarters, as many as 121 mutual funds owned a piece of LYTS, according to MarketSmith data. That’s up from 106 funds a year ago.
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 27% to 81 cents a share and up 11% to 90 cents in FY 2024. The fiscal year ends in June.
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More Cheap Stocks To Watch And Buy
In the meantime, these stocks have made the IBD Stock Screener as companies with either a top Composite Rating or “Fastest Growing EPS” — Endeavour Silver (EXK); Tingo Group (TIO), which has broken out of a five-month consolidation pattern at 1.36, surging 25% a few weeks ago; VOC Energy Trust (VOC), which retook its 10-week line; and Radiant Logistics (RLGT), also featured here in the past.
Radiant has been trading fairly tightly after jumping back above the long-term 200-day moving average. A strong gain from here could trigger either a trendline buy point near 6.60 or an early entry at 6.89.
Chinese video streaming service iQiyi (IQ) recently made the IBD Stock Screener for top stocks in the Composite Rating and trading under 10 a share. Both show wonderful growth in the top line in the past quarter or two and are reaping big profits. But IQ needs to deliver better stock action lately.
Financial marketplace Jiayin Group (JFIN) catapulted out of a new cup base at 3.89 on Wednesday. Shares roared 17% higher in the heaviest turnover in more than a year following Q4 results. On Thursday, JFIN backtracked 6.3% to test buying support at the top of its new pattern. Jiayin cruised higher for a third straight week.
According to MarketSmith, Jiayin posted net income of $1.45 a share, up 303%. That follows EPS increases of 61%, 93% and 77% in the prior three quarters.
Additional Watchlist names include Heritage Global (HGBL), which scored an 800% jump in earnings per share on an 84% revenue increase in Q4; Aurinia Pharmaceuticals (AUPH), which has cleared a nine-month entry of 10.53 in a deep cup-with-handle base before sliding back; and Avadel (AVDL), which is developing treatments for narcolepsy.
Avadel is breaking out of a new cuplike base with a 10.30 buy point. This base sits next to a longer, deeper cup without a handle.
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
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