Cheap Stocks To Buy: 5 Growth Stocks To Watch Right Now
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.
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 $5 to $25, 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 fund manager will have an awfully tough time accumulating shares without making a big impact on the stock price.
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, 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. Today? Zoom stock is forming a new base. Sharers lost buying support at the 50-day moving average on Aug. 11.
The company announced second-quarter results on Aug. 30 after the close; shares have sunk to the bottom of its deep consolidation.
Teladoc roared past an 86.40 proper buy point in mid-January 2020. Seven months later, the stock hit 253, up 193%. Today? TDOC stock is now living beneath its key 50-day moving average, a bearish sign. The 50-day moving average offers chart readers a critical technical level of medium-term price support and price resistance. So, like Zoom, Teladoc is also deep in the weeds of building a new base.
Zoom And Teladoc Aren’t Alone
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 past a new buy point, this time at 525.54.
ADBE stock has rallied sharply, gaining more than 28% and hitting the upside profit-taking zone. Adobe has been a mainstay on the IBD Long-Term Leaders. Lately, though, the stock has sold off and is falling through its 50-day and 10-week moving averages after reporting decent, but not spectacular, fiscal Q3 results.
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 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.
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: Charles & Colvard (CTHR). The expert in lab-produced gemstones is forming a long base that could correctly be called a consolidation pattern. For now, the proper buy point stands at 3.40, a dime above a near-term high of 3.30 set on Sept. 2.
The Morrisville, N.C., firm has rock-solid IBD ratings.
The Composite Rating shines at 96 on a scale of 1 (wizened) to 99 (wizardly). WIT also stands out with a 96 Relative Strength Rating. This means CTHR has outrun 93% of all companies in the IBD database over the past 12 months.
Mutual fund owners in Charles & Colvard stock have jumped to 34 funds as of the second quarter this year from 16 in Q3 2020.
Cheap Stock No. 2
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 formed a flat base with an 8.42 proper buy point.
In late July, WIT cleared this correct entry. Wipro has now gained 16% from the 8.42 breakout point.
The 5% buy zone goes up to 8.83. WIT notched new highs this past week, hitting 9.80. But this week, WIT is suffering its worst weekly decline in well more than a year. Plus, shares are undercutting the 10-week moving average.
A further drop by WIT, followed by a weak attempt to rebound back above the 10-week line, would constitute a sell signal. That is, take profits before recent gains shrink further.
Indeed, Wipro stock has now risen only 5% from the buy point.
The Composite Rating is dipping, but still shines at 95 on a scale of 1 (wizened) to 99 (wizardly). WIT also stands out with a 91 Relative Strength Rating, but this ranking is fading. A 91 RS means Wipro has outrun 91% of all companies in the IBD database over the past 12 months.
Unless WIT offers a secondary buy point in the coming weeks, it will get replaced by another stock making IBD’s Stock Screener.
You might ask: Why is the entry point exactly at 8.42?
For starters, we take the highest price on the left side of a flat base — in Wipro’s case, 8.32 — then add a dime. Moving 10 cents above the base’s high gives the individual trader a sense that large fund managers are earnestly accumulating shares. Again, you want the institutions working with you, not against you.
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.
Cheap Stock No. 3
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.
But on Sept. 13, EVC shares sank more than 5% and may be eyeing a test of the 50-day moving average. That test continued through Monday’s session.
During the week ended July 23, the stock made a sound first test of buying support at the 10-week moving average near 5.62. Since then, EVC has pulled back hard frequently, making new tests of institutional support at or near that rising 10-week line.
Buying shares as close as possible to the 10-week moving average amid a healthy rebound offers the intrepid trader a secondary buy point. Shares garnered a 6% gain in heavy turnover in the week ended Sept. 3 after rising 7.9% in the prior week.
Entravision’s IBD ratings include a 73 Composite — sharply below a preferable level of 90 or higher — and a 98 for Relative Strength. But a solid B+ rating for Accumulation/Distribution has now dropped to a neutral grade of C. The stock also pays a dividend, yielding 1.5% annually.
The company reported strong second-quarter results on Aug. 5. Earnings tripled to 9 cents a share as revenue vaulted 295% vs. a year ago to $178 million.
Entravision has now posted quarterly sales topping $100 million for the third consecutive quarter.
Wall Street sees a profitable future for Entravision, with earnings expected to climb to 38 cents a share this year vs. a net loss of a nickel per share in 2020.
Analysts also see earnings rising another 26% to 48 cents in 2022.
Premium IBD Ratings Galore
Stock No. 4, screening for top Composite Rating: Richardson Electronics (RELL). The stock has cleared a new cup pattern with a 9.09 buy point for the second time in roughly a month of trading. Shares are exiting the 5% buy zone.
In other words, do not chase the stock beyond 9.54.
The LaFox, Ill., company focuses on radio frequency and microwave components for generators, display monitors and other products. Richardson serves the power grid, microwave tube, power conversion, diagnostic imaging markets.
Richardson’s IBD ratings include a 91 Composite — decent yet below a preferable level of 95 or higher — and a 95 for Relative Strength. The stock also hosts a solid A- rating for Accumulation/Distribution on a scale of A (heavy net buying by institutions over the past 13 weeks) to E (heavy net selling).
Chip Leader Stumbles, Then Rights Itself
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 offered an early entry point at 9.92, 10 cents above the high in the week ended June 4.
On July 29, UMC stock broke out with an 8% gain and rallied into the 5% buy zone, which goes up to 10.42 from the 9.92 buy point. Despite a two-week pullback, UMC bullishly held above the key 10-week moving average. United Microelectronics jammed in the week ended Aug. 27, rallying nearly 9% to get well extended past the 9.92 breakout point. The stock rose another 10.7% ahead the next week in active weekly volume.
Notice how the stock is now trading above the top of the long consolidation pattern. Shares also are testing the rising 10-week moving average again. A strong move off the 10-week line would offer a bullish sign that demand for shares by mutual funds, banks, hedge funds, pension funds and the like remains robust.
United’s earnings per share have grown 50%, 350%, 225%, 167%, 400% and 100% vs. year-ago levels in the past six quarters on sales increases of 32%, 30%, 28%, 15%, 19% and 21%. Solid numbers for both Composite Rating (98) and Relative Strength Rating (93). Always remember, these ratings are best used for selecting stocks to buy, not for timing any entries or exits.
A Strong Second Quarter
United Micro reported robust second-quarter results on July 28, doubling earnings to 17 cents a share. According to Yahoo Finance, one analyst saw UMC notching a net profit of 13 cents per share while another saw 15 cents vs. 9 cents a year ago. Sales grew 21% to $1.82 billion. This increase also marked a second quarter in a row of accelerating growth. The top line rose 15% in Q4 2020 and accelerated 19% in Q1 this year.
Emerging Leaders In Transport, Payments Tech, Trucking
Among cheap stocks to buy in the transport sector, dry goods shipping firm Safe Bulkers (SB) and flatbed truck and logistics expert Daseke (DSKE) are acting strong lately. The trio also makes the IBD Screener for companies with high Composite Ratings and trading under $10 a share.
Are these three additional names worthy cheap stocks to buy?
Safe Bulkers crafted a new, relatively deep cup pattern. The new buy point stands at 4.56 — a dime above the base’s left-side peak. A handle also formed with a 4.35 entry. On Sept. 10, a breakout past 4.35 fizzled. But SB surged the next session, soaring nearly 17% in huge turnover. Bullish. Shares have quickly gotten extended past the 5% buy zone.
The past three sessions? Highly disappointing, as SB has now made another round trip of handsome gains from that 4.35 pivot point.
Such action triggers a key defensive sell signal. However, the stock is making a smart recovery.
Safe Bulkers’ industry group compatriot, Star Bulk Carriers (SBLK), got some airplay in the Sept. 7 edition of IBD Live, as well as on Friday’s show, Sept. 24. The stock is, for now, surviving a sell-off and test of the 50-day line.
Daseke, for a while, topped the 5% buy zone after rolling past a 9.10 entry in its own consolidation. But shares struggled this past week and now trade mildly below the breakout point. Daseke is also battling to keep its 50-day moving average.
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