Bull market or bear 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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450% William O’Neil Winner Profited Off Of This Significant Medical Sector Innovation
After all, 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, seems irresistible.
But do you know the unique problems and subtle challenges of hunting cheap stocks to buy for big gains? Let’s consider a few.
The First Challenge
Hundreds of equities trade at a “low” price on both the Nasdaq and NYSE. So, how can you pick the winners consistently?
Here’s a second challenge: Most institutional money managers don’t touch cheap stocks.
Imagine a large-cap mutual fund trying to buy tens or even hundreds of millions of dollars’ worth in a stock that trades at 30 cents a share. If trading volume is thin, the fund manager would have an awfully tough time accumulating shares — without making a big impact on the stock price.
Third, IBD research over the decades finds that dozens, if not hundreds, of great stocks each year do not start out as penny stocks. They tend to already trade at 20 or 40 a share before they break out of a bullish pattern, then go on mind-blowing rallies.
Fourth, identify solid, expanding institutional buying among fundamentally strong companies — even in those stocks with double-, triple- and even quadruple digit share prices. Institutional accumulation plays a big role in successful investing in growth stocks.
Another cold, hard truth that proponents of penny stocks don’t tell you? Many low-priced shares stay low for a very long time.
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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 dud stock. You also face the losing opportunity of investing in a true stock market leader such as names that enter IBD Leaderboard or a standout in the IBD 50, IBD Sector Leaders, the Long-Term Leaders, or IBD Big Cap 20.
Four 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 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.
Never forget the No. 1 rule of investing: keep your losses under control.
Check Out IBD Live! Trade Top Stocks With Growth Investing Experts And Pros
Stock No. 1: New China Stock
On Monday, Lichen China (LICN) did not follow the path of PDD (PDD), which cratered 28% after reporting disappointing second-quarter results. On Monday, the stock jumped 23 cents, or 11%, to 2.26. The stock eased nearly 5% in lower volume on Tuesday.
The daily chart shows the microcap provider of taxation and consulting services attempted a move past a resistance level at 2.13, its intraday high of Dec. 29, several times since April. In at least four instances, Lichen failed to sustain its rally. The two-day drop on Aug. 2 and 5, when Lichen dropped as much as 33% from its Aug. 1 intraday peak of 2.44, underscores just how risk surrounds cheap stocks, no matter how good their IBD ratings may be.
Another concern: Lichen China, with a market value of $59 million, still trades below its IPO price of $4 per share, according to MarketSurge.
Technically, the stock also harbors numerous positive traits.
For starters, Lichen has nearly quintupled since bottoming at 50 cents on April 23. LICN jumped back above its 50-day moving average on June 20 and has stayed above it. Plus, the 50-day line has adopted a bullish upward slope.
Meanwhile, a weekly chart shows Lichen China stock finding buying support near its 10-week moving average since mid-May. Future rebounds off the 10-week line could in fact offer a safer buy point vs. a breakout to 52-week highs.
Based on MarketSurge data, the company has posted results on a six-month basis. In the second half of 2023, Lichen China reported earnings of 26 cents a share, up 63% vs. a year earlier, on a 35% rise in revenue to $23.8 million.
Lichen has 27 million shares outstanding and a current market value of $57 million.
It is certainly worthwhile combing through Lichen’s 20-F and 6-K filings on the SEC’s company filings search website.
Here are the key IBD ratings for LICN:
Composite Rating: 95 on a scale of 1 to 99
Earnings Per Share Rating: 94 on a scale of 1 to 99
Relative Strength Rating: 98 on a scale of 1 to 99
Keep track of changes in these and other ratings via IBD Stock Checkup.
Stock No. 2: An Aerospace Firm
CPI Aerostructures (CVU), which trades on the Amex and makes structural parts for fixed-wing aircraft and helicopters, bolted out of an early-stage cup with a 2.94 buy point on Tuesday. Shares climbed more than 4% and hit a session high of 3.09 in thick turnover.
CPI on average trades just 32,600 shares a day. Yet CPI is showing much better relative strength vs. the S&P 500 over the past three weeks.
The 5% buy zone from the 2.94 entry point goes up to 3.09. It’s critical to avoid buying too high in price after a breakout attempt.
One could have drawn a trendline from the cup’s left-side peak and determined a lower, more aggressive buy point near 2.70.
The Edgewood, N.Y., firm began trading on the American Stock Exchange in late September 2022. The company recently reported a 22% rise in second-quarter earnings to 11 cents a share on a 1% increase in sales to $20.8 million. MarketSurge showed no full-year earnings estimates.
A 2.3 up/down volume ratio is highly bullish. It signifies heavy volume during up days vs. down days over the past 50 trading sessions. Please check out this Investor’s Corner for more on the up/down volume ratio.
Here are the key IBD ratings for CVU:
Composite Rating: 87 on a scale of 1 to 99
Earnings Per Share Rating: 85 on a scale of 1 to 99
Relative Strength Rating: 70 on a scale of 1 to 99
Keep track of changes in these and other ratings via IBD Stock Checkup.
Updated on Aug. 26
Cheap Stocks To Buy: A New Breakout
Idaho Strategic Resources (IDR), which trades on the American Stock Exchange, entered this column in early July as it was rallying sharply. Idaho Strategic boasts a perfect 99 Composite Rating.
On Monday, Idaho Strategic rallied 4% in above-average turnover after bullishly rebounding back above the rising 50-day moving average on Aug. 19.
This column noted that Idaho became actionable now as it crossed a trendline near 10.50. One can draw a trendline from the July 10 peak of 11.81. The 5% buy zone goes up to 11.03.
Meanwhile, the stock has also put in the necessary time to fashion a complete base. So, it’s totally fine for investors to refrain from acting upon a trendline entry and to instead wait for a base to furnish a traditional buy point, which in Idaho Strategic’s case is 11.80.
Gold futures expiring in December have hit an all-time high of $2,570 per ounce. Keep in mind that gold stocks, like gold, can swing sharply day to day.
On Aug. 8, the company announced it was awarded $430,000 in grants to upgrade public power facilities that would help develop the Golden Chest Mine as well as benefit the town of Murray, Idaho.
A Quick Round Trip After Breakout
On July 2, the stock cleared a narrow six-week base with a 10.60 correct buy point with vigor. Volume popped to 319,000 shares, almost quadruple the stock’s average over the past 50 sessions. Just five trading days later, Idaho Strategic ran up to 11.80, an 11% gain from the 10.60 pivot. It quickly exited the 5% buy zone, which went up to 11.13.
Shares then fell back sharply. They slipped beneath not only the 10.60 entry but also the 50-day moving average.
The company reported Q2 results on July 30, and they were excellent. Earnings vaulted 467% to 17 cents a share on an 89% jump in sales to $6.1 million. Nonetheless, the near-term rally lost steam.
Cheap Stocks To Buy: Eye The Relative Strength Line
Also in early July, IDR’s relative strength line (drawn in blue in the above chart) moved into new high ground, triggering the RS Line Blue Dot alert on MarketSurge.
From 2018 through 2022, Idaho Strategic posted a cumulative net loss of 62 cents a share. But in 2023, the firm earned 9 cents a share. Operating cash flow at Idaho Strategic was robust at 21 cents per share.
The weekly chart shows how IDR has carved a solid uptrend since bottoming near 4.50 in October.
Idaho Strategic, based in Coeur d’Alene, trades on average 74,000 shares per day. Please be mindful of liquidity risk.
The company has a stock market valuation of $141 million, 12.7 million shares outstanding, and a float of 10.3 million freely traded shares.
Here are the key IBD ratings for IDR:
Composite Rating: 99 on a scale of 1 to 99, up from 95
Earnings Per Share Rating: 81 on a scale of 1 to 99, up from 45
Relative Strength Rating: 96 on a scale of 1 to 99
Keep track of changes in these and other ratings via IBD Stock Checkup.
Cheap Stocks To Buy No. 4: Watch This Bank
Banco BBVA Argentina (BBAR) has made an outstanding short-term run since a breakout in February at 6.37. The bank has lumbered its way back above the 50-day moving average.
A new base is forming and it has the elements of a double-bottom entry. The middle peak between two recent lows of 9.47 and 9.31 has produced a new buy point of 11.16.
As this column noted in early June, a strong rally off the 50-day line would trigger a follow-on entry point. However, BBAR failed to rebound sharply at the time. At this point, stay patient and watch for a good base to develop.
Earnings Turnaround Candidate
Banco BBVA is a long-term earnings turnaround candidate.
Wall Street expects earnings to fall 38% this year to 88 cents a share, up from an earlier estimate of 72 cents. Banco BBVA’s earnings are also seen rebounding 36% to $1.20 a share.
The Global X MSCI Argentina (ARGT) exchange traded fund has rallied 21% for the year as new Argentine President Javier Milei works to shore up the country’s finances and increase confidence among institutional investors overseas. Argentina has suffered years of radically high inflation, which all but destroys the purchasing power of Argentine citizens. Yet Milei has received preliminary kudos for cutting government personnel by the hundreds.
Meanwhile, analysts surveyed by FactSet see Banco BBVA turning a 111% boost in profit next year to $1.52 a share. The bank does not pay a dividend currently.
Here are the key IBD ratings for BBAR:
Composite Rating: 76 on a scale of 1 to 99, down from 79.
Earnings Per Share Rating: 34 on a scale of 1 to 99
Relative Strength Rating: 96 on a scale of 1 to 99, down from 98.
Keep track of changes in these and other ratings via IBD Stock Checkup.
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Small Cap Transport Leader
Himalaya Shipping (HSHP) recently joined IBD Stock Screener. Shares formed an eight-week flat base with an 8.54 correct buy point, then broke out in early May.
Gains reached 14% from the 8.54 pivot, but those profits are now gone. On July 5, Himalaya Shipping gapped lower in bad fashion, undercutting the 50-day line and dropping below the buy point. It’s struggled to rebound. The stock is trying to hold around the 200-day moving average. Great stocks rally after testing this long-term technical price level of support and resistance.
But now, the stock is trying to find its footing around the rising 200-day moving average. If Himalaya undercuts the Aug. 5 low of 7.04, it will likely get the boot.
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Not All Patterns Work Out
Clearly, Himalaya Shipping needs time to build a potential new base.
The company ships dry goods and operates two tankers globally. Himalaya’s Transport-Ship industry group recently ranked No. 1 among 197 industries tracked by IBD over the past six months. It’s dropped back to 38th. Track all 197 industry groups at IBD Data Tables. Plus, the NYSE + Nasdaq Smart Tables shows leading components among the 33 different sectors, ranked by a combination of short- and long-term price performance metrics.
HSHP is staging a rebound after reporting second-quarter results on Aug. 16. Earnings surged to 16 cents a share vs. a net loss of 3 cents a year earlier. Sales soared 364% to $31.2 million.
The stock has 40.8 million shares outstanding, a float of 37.1 million freely traded shares, and a market cap of $391 million. One major risk: Himalaya Shipping trades less than $1 million in average dollar volume each day.
Here are the key IBD ratings for HSHP:
Composite Rating: 91 on a scale of 1 to 99, up from 82
Earnings Per Share Rating: 81 on a scale of 1 to 99
Relative Strength Rating: 72 on a scale of 1 to 99, up from 59
Keep track of changes in these and other ratings via IBD Stock Checkup.
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A Few More Candidates
A view of the IBD Stock Screener reveals these strong movers lately: Energy Services Of America (ESOA), which has cleared a 9.49 cup buy point; Commscope (COMM), which has surpassed the 4 price level for the first time since early August of 2023; and Bioventus (BVS), which has rocketed more than 78% in the third quarter so far. It also surpassed the 10 price level for the first time since June 2022.
The 5% buy zone from ESOA’s breakout point of 9.49 goes up to 9.96. So the Huntington, W. Va., contract-based oil and gas pipeline installer is extended for now.
The weekly chart of Bioventus shows at least six weekly gains in unusually heavy turnover, a sign of institutional demand.
The developer of treatments for musculoskeletal conditions has a market value of $800 million. Yahoo Finance shows a 2024 profit estimate of 39 cents a share.
These stocks may get more analysis in this column in the near future.
Cheap Stocks To Buy: How To Spot The Buy Point
IBD’s buy rules traditionally used to add a dime above, say, the handle in a cup with handle, or the left-side peak of a flat base. Now, IBD has reduced it to simply a move past the pivotal price points in these historically proven chart patterns.
Decades ago, William O’Neil, founder and longtime 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.
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 the outlook shows a confirmed uptrend.
Want To Find The Best Cheap Stocks? Check Out IBD Stock Screener
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 what price you purchased shares for, 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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