Bull market or bear market? Or a trend-less market as seen for weeks until news late last month that political leaders on both sides of the U.S. chambers of Congress reached a deal to raise the debt ceiling? 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, 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 a meaningful stake 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 shares. They tend to already trade at 20 or 40 a share before they go on mind-blowing rallies.
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. The I stands for institutional ownership.
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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 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.
Let’s consider Zoom Video (ZM) in 2020, one of the superstars coming out of the 2020 coronavirus bear market.
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 businesses, supercharged sales and earnings growth, and heavy 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 peak the same year at 588. Now? Zoom stock is working on a new base and trying to bottom out. ZM is still trying to climb resolutely above the 200-day moving average.
After rallying from 63.55 to 85.13 from December last year to early February, the stock has been hitting upside resistance near 75 for more than five months. The stock recently tried to break out of a first-stage cup pattern with a 75.10 buy point, but the breakout withered fast.
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5 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.
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: Gold Stock Emerges
Kinross Gold (KGC) has joined the IBD Stock Screener after achieving a 94 Composite Rating on a scale of 1 to 99. It’s dipped to a 91. Meanwhile, the Relative Strength Rating of 90 has shrunk to an 83, a negative sign.
KGC shares are forming a new base after topping in early May at 5.57. Since then, Kinross has kept a tidy decline. At a recent low of 4.54, KGC corrected all of 18%.
Plus, the stock has yet to gouge its long-term 200-day moving average amid the pullback. However, KGC on Tuesday scored a fourth straight loss amid a pullback in gold futures.
An early entry point emerged near 5.23, and KGC briefly surpassed the buy point. Yet gold shares as a whole have not gained strength in recent weeks.
The gold and silver mining industry group has fallen to 184th out of 197 IBD industries for six-month relative performance.
The base’s left-side high also produces a standard buy point of 5.57. But it would take a nearly 10% advance for that entry point to trigger.
Arguably, KGC had also become actionable in the 5.05 to 5.10 price zone, considering a trendline that could be drawn across the recent highs at 5.57, 5.23 and 5.13. But shares have drifted lower since the early breakout move.
Please check out this Investor’s Corner on how to find an early entry point with the aid of a trendline.
Analysts on consensus see Kinross posting earnings of 37 cents a share this year, up 70%.
The past four quarters have shown terrific fundamentals. Kinross’ earnings grew 400%, 350%, 40% and 367% vs. year-ago levels over the past four quarters. Sales picked up 47%, 75%, 33% and 33% over the same time frame.
On Tuesday, gold futures traded near $1,919 an ounce.
Insurance Play Emerges
Tampa-based Heritage Insurance (HRTG) defied the market decline on Tuesday. Shares roared 16% higher in the heaviest turnover so far in 2023.
Notice on a daily chart how back on Aug. 9, the stock jumped past a a 4.86 buy point in a 12-week cup with handle and quickly gained more than 25% in the span of five days. However, amid the August stock market pullback, HRTG quickly surrendered all of that juicy advance.
For a couple days, the stock dwelled below the key 50-day moving average. However, buying has picked up across the insurance sector. Heritage is no exception.
At this point, while HRTG is now sharply extended past the original 4.86 pivot point, a new base might form. Watch to see if the stock faces stiff upside resistance near 6.
The company offers residential insurance for both owners of single family homes and condominiums in Florida. Amid a strong rise in premiums across the industry, Heritage Insurance is also seeing top-line growth accelerate.
Fundamentals Accelerate
In the third quarter of 2022, revenue edged 1% lower to $165.5 million. Then revenue picked up 5%, 12% and 13% in the next three quarters through Q2 of this year.
Profits have also jumped sharply, going from a sharp net loss of $1.83 a share in Q3 2022 to strong gains the next three quarters. In the second quarter of this year, profit rose 191% to 32 cents a share.
Hurricane Ian, which devastated parts of Ft. Myers, Sanibel Island and the surrounding Gulf Coast area, made landfall on Sept. 28 last year. That disaster blew a big hole through the company’s profitability in that quarter.
On Aug. 8 this year, the company reported a third consecutive quarter in which its net combined ratio, a measure of operating costs, held below 100%.
CEO Ernie Garateix noted that the company took action to make “significant rating actions,” improve its underwriting operations, and engage in “selective organic growth” of its commercial residential business to boost the quality of its insurance book. Heritage also raised its average premium by 24% vs. a year earlier.
The thinly traded company has an average daily volume of 185,000 shares. It has a market value of $157 million and 25.6 million shares outstanding.
Cheap Stocks To Buy, Numero Tres
Betterware de Mexico (BWMX) has staged a new breakout to new 52-week highs and is acting well. Notice how its relative strength line has continued to charge into new high ground. That’s a strong sign of BWMX’s outperformance vs. the S&P 500.
BWMX’s Composite and RS ratings continue to stay strong; both are currently at 98 and 98, respectively, on a scale of 1 to 99.
At this point, watch for a potential pullback to the 10-week moving average. In a bullish market, the best stocks often test the buyers at the 10-week line a few weeks or months after a sound breakout. The first two test of the key technical level can offer a secondary entry.
However, IBD on Sept. 20 downgraded its outlook for stocks to the worst-possible state of market in a correction. So, new buys are not warranted, and losses should get cut.
On July 31, the stock rallied more than 6% in strong turnover. It also staged a rebound off its 10-week moving average near 13, creating an entry point after its initial breakout on April 28. Betterware also cleared stubborn upside resistance at around 13.50.
Another way to view the action? Tight price action since early June acted like a handle on a large, deep cup pattern.
The stock enjoyed a fantastic August. Plus, the pullback in September remains totally normal looking.
BWMX has gained as much as 187% so far this year. If BWMX rises to a range of 15.60 of 16.25, that would send the stock into the 20%-25% profit zone from the latest entry point near 13. And that could mark a great time to take at least partial gains.
Shares gained ground after the company reported second-quarter results on July 27. Betterware recorded a 5% increase in earnings to 41 cents a share. Revenue rose 17% to $188 million. In the first quarter, the company saw a 21% dip in earnings to 29 cents a share despite a 93% leap in sales to $181.4 million. So, the profit picture brightened. However, IBD’s growth stock selection criteria prefer companies that are seeing profits rising at a faster rate than sales, not the other way around.
Therefore, BWMX stock may still get replaced in this column.
A narrow trendline could be drawn from the year-to-date peak of 12.39 and through the 11.46 near-term high marked on March 16. This trendline produced an aggressive entry point near 10.70, which BWMX cleared in late March.
Mexican stocks have thrived so far this year. For instance, iShares MSCI Mexico (EWW) has cleared through upside resistance near 60, then recently tried to rally past 65. So far, the exchange traded fund has gained 33% year to date. The ETF is staging a new test of buying support at the 50-day line.
Special Trading Risk In Betterware
Another risk with buying Betterware stock? BWMX trades just 48,000 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%, 56% and 93%. Trailing 12-month sales total $665 million.
According to MarketSmith, analysts on consensus see the company earning $1.50 a share this year, up 48%, and $1.97 a share in 2024. Betterware posted a net profit of 42 cents a share in 2020, $2.38 in 2021 and $1.01 in 2022.
The number of mutual funds owning a piece of the small cap has dwindled to 9 at the end of Q2 this year. That’s up from 8 funds in Q1 but still well below a two-year peak of 28 funds in both the second and third quarters of 2021. Ownership should rise, not fall.
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 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.
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.
Specialty Enterprise Software Play
Cellebrite DI (CLBT) had moved in grand form since it cleared a 13-week base at 6.22 in June. Shares rallied 31% to a 52-week high of 8.15 before pulling back.
At this point, watch for a potential test of the 50-day moving average (on a daily chart) or its 10-week moving average. With the IBD outlook recently downgraded to market in correction, that’s exactly what’s happening with CLBT.
A strong bounce off the 10-week line could trigger a follow-on entry point. However, breakouts hold a smaller chance of success when the market is not in a strong confirmed uptrend. Please read this recent IBD Big Picture column for more detail.
Stocks in fact have treaded more or less sideways for weeks ahead of a Sept. 19-20 Federal Reserve meeting on interest rates.
The weekly chart also highlights a more than 100% gain since shares bottomed out at 3.80 in October 2022.
Meanwhile, continued sideways trading around the 8 price level could lead to a new base and a new entry.
The digital intelligence software firm helps clients conduct investigations. Earnings in the second quarter jumped to a nickel per share vs. a penny loss a year ago as sales increased 23% to $76.7 million. That marked the strongest top-line increase in five quarters. In the prior four quarters, sales rose 6%, 9%, 9% and 14% vs. year-ago levels.
Small cap Cellebrite DI has a market value of $1.4 billion and 189.6 million shares outstanding.
The 96 RS Rating is very good. Cellebrite DI also hosts a superb 98 Composite Rating.
Cheap Stocks To Buy: No. 5
Cantaloupe (CTLP) surged out of a deep, large cup with handle on May 5 with a 6.22 correct buy point. Shares rose 22% that week in accelerating weekly turnover. Shares are still forming a new base with a potential 8.29 new entry. But CTLP has failed to break out again. Also, shares have sliced through the 50-day moving average, a negative sign.
At this point, buying support at the long-term 200-day moving average is critical.
The 5% buy zone from the prior breakout point of 6.22 went up to 6.53. So, in the same week that CTLP broke out, the stock got extended past the proper buy range.
However, Cantaloupe’s rally has soured. At 6.22, the stock has given back all gains from the breakout.
When a stock threatens to give back all of its double-digit percentage gain, it’s time to protect any profits that remain. The stock can always be bought back in better stock market conditions.
The handle portion of Cantaloupe’s massive base was long enough to act as a base of its own. Either way, the buy point stayed the same at 6.22 — when it crossed the handle’s high of 6.22.
Readers new to the IBD style of growth stock picking may ask this: Why buy no more than 5% above a pivot point? The answer: You’re less likely to get shaken out with a 7%-8% loss if the stock makes a perfectly normal pullback after a hot run. And the drop in Cantaloupe in May back to 6.01 offers a real example.
The stock eventually recouped all of May’s declines, thus keeping the new breakout intact. Plus, the 10% gain in the week ended June 9 came in accelerating weekly turnover. That’s another telltale sign of healthy and strengthening demand among institutional investors.
Meanwhile, the small-cap growth stock also triggered a key IBD sell rule: take at least some profits when the gain from a breakout point reaches 20% to 25%. In this case, that’s when CTLP rose to a range of 7.46 to 7.78.
Shares have soared more than 90% for the year so far. Yet if Cantaloupe does not bottom out and start to rally again soon, it too will get the chop.
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Cantaloupe made the IBD Stock Screener as one among 136 stocks with a top Composite Rating and trading under $10 a share. The 88 score is still decent given that Cantaloupe holds a middling 56 Earnings Per Share Rating. Net losses from fiscal 2019 through fiscal 2022 have hurt the stock’s EPS Rating. An 87 Relative Strength Rating is healthy but has fallen from 94 a few weeks ago.
In July, the stock’s relative strength line powered into new high ground — a classic sign that CTLP is sharply outperforming the S&P 500. But the RS line has fallen sharply since late August, a no-no.
Cantaloupe does not sell fruit. The Malvern, Pa., firm provides both hardware and software for the self-service business market. Its Three Square Market product is a “one stop shop for everything micro markets.” Cantaloupe’s Seed Live software helps users track and analyze sales information in real time.
Shares roared after Cantaloupe reported a 200% spike in fiscal second-quarter earnings to 9 cents a share. Sales rose 20% to $60.4 million. The firm lost a cumulative 16 cents a share in the prior three quarters. However, Wall Street sees Cantaloupe posting earnings of 7 cents a share in the fiscal year ending in June.
The company is slated to report fiscal fourth-quarter results on Sept. 6.
CTLP’s market value has surpassed $575 million. The small cap holds 72.5 million shares outstanding and a float of 57.3 million freely traded shares.
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In the meantime, new stocks have made the IBD Stock Screener as companies with either a top Composite Rating or “Fastest Growing EPS.”
Carrols Restaurant Group (TAST), a major franchisee of Burger King restaurants, broke out of a symmetrical eight-week cup at 6.06. The 5% buy zone goes up to 6.36, so TAST had gotten extended. However, shares have slipped below the 50-day line and below the latest cup’s pivot point.
The company reported robust second-quarter results. Carrols earned 27 cents a share, reversing a net loss of 18 cents in the year-ago quarter. Sales grew 10% to $485.2 million.
Notice in the base how TAST rallied six weeks in a row in forming the bullish pattern, a plus. Multiple up weeks in a row point to serious buying among fund managers.
The stock’s relative strength line is sizzling at new highs. Watch to see how it handles the 7 to 8 price level, where it stumbled in March 2021.
Tat Technologies (TATT), the Israel-based specialist in heat transfer and electric motion systems, has rolled smoothly past a long consolidation pattern with a 6.89 proper buy point. The breakout saw heavy volume, a good sign.
A new pullback has so far come in lighter trade. The 5% buy zone extends to 7.23. Tat’s base began forming in September last year. But relatively tight trading in recent weeks has evolved into a flat base with a new entry point at 7.72.
After some wild action in recent weeks, TATT has moved swiftly past this new buy point as well and has gotten extended again after reporting solid second-quarter results (earnings of 15 cents a share vs. a penny loss a year earlier, sales up 29% to $26.8 million).
The stock has also so far shown a bullish footing near its rising 10-week moving average.
Tat notched two straight quarters of earnings in the past two quarters. From 2020 to 2022, Tat lost a cumulative total $1.02 a share. Tat’s sales have accelerated from a 4% drop in Q2 of 2022 to gains of 19%, 12% and 26% vs. year-ago levels.
MarketSmith does not list any profit estimates for 2023 or 2024.
A few more candidates worth considering include OppFi (OPFI), part of IBD’s financial software industry group; Newpark Resources (NR), which belongs to the 2nd-ranked oil and gas field services industry group; and Eltek (ELTK), a electronics contract manufacturer highlighted in this story in the past. Eltek remains very volatile. All three stocks score a Composite Rating of 98 or higher.
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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