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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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.
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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.
Solid, expanding institutional buying among fundamentally strong companies with double-, triple- and even quadruple digit share prices makes up the I in CAN SLIM, the historical acronym representing IBD's seven-factor paradigm of successful investing in growth stocks. The I stands for rising 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 (monthly chart above), 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 sixfold to its peak the same year at 588.
How about now?
Zoom stock plunged 90% to a low of 58.87 in a correction that has lasted more than three years.
As seen in the daily chart above, ZM continues to try building a new base and bottoming out. ZM is still trying to climb resolutely above the 200-day moving average. The recent action underscores the importance of having sound sell rules to lock in paper profits.
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. On Sept. 5, Zoom attempted to break out of a first-stage cup pattern with a 75.10 buy point, but the breakout withered fast. The stock triggered the golden rule of investing: Cut losses quickly and keep each loss small.
A new base continues to develop in Zoom shares. Yet a 22 Relative Strength Rating has fallen even further from a 51 a few months ago. The 3-month RS Rating is even weaker at 19, also on a scale of 1 to 99, according to MarketSurge.
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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.
Never forget the No. 1 rule of investing: keep your losses under control.
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Cheap Stocks To Buy, No. 1: A New Gold Mining Leader
New to this column, IBD Stock Screener flagged Aris Mining (ARMN), and the stock roared out of a choppy cup pattern with a 3.54 proper buy point. Trading has since gone sideways lately. But on Wednesday, the stock rallied 3.4% amid a tough day for major averages.
The proper buy zone from Aris' breakout point goes up to 5% past 3.54, or 3.72. Therefore, ARMN remains in the buy zone, yet barely.
On Monday, gold futures on the Comex exchange rose 0.4% to $2,365.80 per ounce, a new record high. Front-month gold futures for April delivery moved up 14.7% year to date. On Wednesday, gold futures traded as high as $2,384.90.
Notice on the weekly chart how Aris' base is part of a much longer, deeper basing pattern. Yet, the latest base shows a milder drop of 27% from high to low. That's good. You want to see a correction of no greater than 33% for most bases.
Read more about the most important bases, or chart patterns that could lead to a strong breakout to new highs and profits for investors who use charts to time new buys, in this Investor's Corner column.
Aris' current base formed over 12 weeks. The stock pole-vaulted above the 10-week moving average in electrifying volume after Aris reported a 200% jump in earnings to 9 cents a share. Sales rose 21% to $125 million, the biggest amount in a single quarter over at least two years.
According to MarketSurge, the Vancouver-based company owns and operates gold and silver mining properties in Colombia. Sales over the past four quarters totaled $448 million.
Here are the key IBD ratings for Aris:
Composite Rating: 97 on a scale of 1 to 99, up from 95
Earnings Per Share Rating: 59 on a scale of 1 to 99
Relative Strength Rating: 93 on a scale of 1 to 99, up from 91
Keep track of changes in these and other ratings via IBD Stock Checkup.
Cheap Stocks To Buy: Restaurant Firm In A New Base
Also new in this column: Rave Restaurant Group (RAVE) surged during two weeks in late March, rising more than 22% in accelerating turnover. The stock is holding much of that gain in bullish fashion. But shares got rocked on Wednesday, sinking 3.5% in above-average trading.
Rave held above its 50-day moving average, which continues to rise gradually.
While the stock is forming a new base, the cuplike pattern still needs plenty of work on the right side. However, Rave triggered a trendline entry point when it crossed the 10-week moving average near 1.91 two weeks ago.
Watch to see if the microcap can clear upside price resistance near 2.20-2.30. That level may create another early buy point. The 5% buy zone also applies.
This Investor's Corner gives tips on how to spot an early entry point with a trend line.
Based in Colony, Texas, Rave owns and franchises Pizza Inn restaurants in the South within the U.S.
Please know that RAVE is extremely thin. It trades just 32,000 shares on average per day.
Here are the key IBD ratings for Rave Restaurant:
Composite Rating: 91 on a scale of 1 to 99, up from 89
Earnings Per Share Rating: 97 on a scale of 1 to 99
Relative Strength Rating: 66 on a scale of 1 to 99, down from 71
Keep track of changes in these and other ratings via IBD Stock Checkup.
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No. 3: Biotech Nears A Follow-On Entry
New to this column: Arcutis Biotherapeutics (ARQT) has made an enormous gain since it bottomed out during the fourth quarter of 2023 at 1.76. From that price, shares have barreled 601% higher to as high as 12.35.
Since then, ARQT shares have pulled back in constructive fashion. Despite a fresh pullback, the stock is still trading above the 50-day moving average. Yet the 12 level is proving a high hurdle.
Notice on a weekly chart how a few weeks ago, Arcutis almost touched its rising 10-week moving average.
After a breakout, the first or second pullbacks to the 10-week line may provide a follow-on buy point, so long as the stock market shows a solid confirmed uptrend.
Arcutis, based in Westlake Village, Calif., near Los Angeles, specializes in treatments for skin disorders.
On Dec. 15, the company got FDA approval to market its Zoryve topical foam to treat seborrheic dermatitis in patients aged 9 and older.
Arcutis is not yet profitable. But sales have picked up steam, going from $700,000 during the third quarter of 2022 to $3 million, $2.8 million, $5.2 million, $38.1 million and $13.5 million in the next five quarters. Wall Street forecasts sales of $13.9 million in the first quarter of 2024 and a net loss of 80 cents per share.
Here are the key IBD ratings for Arcutis:
Composite Rating: 89 on a scale of 1 to 99, up from 87
Earnings Per Share Rating: 48 on a scale of 1 to 99
Relative Strength Rating: 99 on a scale of 1 to 99, up from 98
Keep track of changes in these and other ratings via IBD Stock Checkup.
Specialty Enterprise Software Play Offers New Entry
Cellebrite DI (CLBT) has been featured in this column for months. Shares failed to join the stock market's broad rebound Thursday. Since then, shares have continued to weaken.
A new base may be forming; so far, Cellebrite has fallen 17% from its 12.50 near-term peak.
On Monday, the stock fell for a fourth straight session and losing important support at the rising 50-day line. A failure to rebound soon would highlight it's time to sell shares and book gains.
In the last full week of January, the stock had a marvelous gain, rising 8.4% in heavy volume. Shares pulled back modestly after stroking new multiyear highs, then soared 21% during the week ended Feb. 16.
As the weekly chart shows below, Cellebrite is pulling back again. Last week, CLBT closed sharply below the 10-week moving average, indicating a new base may form.
Here are the key IBD ratings for Cellebrite:
Composite Rating: 92 on a scale of 1 to 99
Earnings Per Share Rating: 74 on a scale of 1 to 99
Relative Strength Rating: 94 on a scale of 1 to 99; MarketSurge shows an 80 RS Rating over a three-month time frame.
Keep track of changes in these and other ratings via IBD Stock Checkup.
The strong move in mid-to-late January re-energized its breakout from a prior base with an 8.29 buy point. The 5% buy zone went up to 8.70. Therefore, Cellebrite got sharply extended from this proper entry. However, CLBT also triggered a new entry.
Cellebrite has also rebounded back above the 10-week moving average at 8.40.
The first and second test of the 10-week line, following a good breakout from a primary base, offers a fresh chance to add shares or even initiate a new position.
The Initial Buy Point In Cellebrite DI
The nearly 11-week base displayed elements of a double bottom and a proper buy point of 7.79.
CLBT 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. But the recent pullback illustrates the value in taking profits once a stock has risen 20% to 25% from a key breakout point.
Cellebrite DI wound up constructing a new base that also has elements of an authentic double-bottom base with a 7.79 middle peak in between the base's two lows.
Back in November, this column wrote the following:
"At this point, watch for a potential test and strong rebound off its long-term 200-day moving average (on a daily chart) or its 40-week moving average on the weekly chart. With the IBD outlook recently downgraded to market in correction, that's exactly what's happening with CLBT."
The weekly chart highlights a 213% gain since shares bottomed out at 3.80 in October 2022.
This column also noted that continued sideways trading around the 8 price level could lead to a new base-on-base pattern and a new entry.
The digital intelligence software firm helps clients conduct investigations. In mid-February, Cellebrite posted a 38% jump in earnings for the fourth quarter to 11 cents a share. Revenue accelerated, rising 26% to $93 million, likely the highest quarterly top-line figure in company history.
In the prior six quarters, sales rose 6%, 9%, 9%, 14%, 23% and 17% vs. year-ago levels.
Small cap Cellebrite DI has a market value of $2.1 billion and 192 million shares outstanding.
Cheap Stocks To Buy: Japan Lender
Mitsubishi UFJ Financial (MUFG) ADRs cleared a fresh base in late January with a 9.04 buy point. The base was shallow enough to qualify as a flat base.
In a flat base, the decline from high to low cannot exceed 15%.
MUFG, however, is beginning to fall sharply. It's on pace to drop for a fourth straight week. failing a key test of buying support at the 50-day moving average. The banking play looks poised to craft a new base, but it's not clear yet if shares have bottomed.
Mitsubishi UFJ had reached the 20%-25% profit-taking zone for those who bought at 9.04. Selling shares on the way up after a strong breakout is a key IBD selling principle.
Mitsubishi UFJ has notched a good run since October 2022 amid a renaissance for Japanese equities.
The Nikkei 225 benchmark recently eclipsed its December 1989 peak of 38,915. The Nikkei (pronounced Nick-Kay) has also surpassed 40,000 for the first time in history and rose more than 20% in Q1 of this year.
In the week ended Jan. 26, Mitsubishi UFJ rose 4.2%. That ignited the breakout. Shares then added another 2.8% in even heavier weekly volume.
The 5% buy zone in MUFG, a megacap financial stock, went up to 9.49. Therefore, the Japanese bank stock, even after additional gains this week, has gotten out of the reasonable purchase range.
Here are the key IBD ratings for Mitsubishi UFJ:
Composite Rating: 90 on a scale of 1 to 99, down from 92
Earnings Per Share Rating: 94 on a scale of 1 to 99
Relative Strength Rating: 88 on a scale of 1 to 99
Keep track of changes in these and other ratings via IBD Stock Checkup.
Mitsubishi UFJ's relative strength line dipped in March after rising for two straight months. Yet the uptrend since late 2022 in the RS line indicates outperformance vs. the S&P 500.
Japan's Mitsubishi UFJ also ranks highly within IBD's Banks-Money Center industry group. Please go to MarketSurgeto see the entire 26 components of the money center industry group.
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The company has been consistently profitable over the past seven-plus years. In the fiscal year ended March 2023, Mitsubishi earned 68 cents a share, down 6%.
Wall Street expects profit in the fiscal year ending March this year rising 15% to 78 cents and up 11% to 86 cents in FY 2025 (ending in March that year). Both estimates have gotten a bump up.
Amid steady growth in the Japan economy and much better performance by Japanese equities, the megacap bank has seen revenues climb 18%, 14%, 55%, 33%, 21%, 30% and 7% vs. year-ago levels in the past seven quarters.
The banking giant recently posted a 217% spike in earnings for the December-ended fiscal third quarter to 22 cents a share. Revenue rose 7% to $20.1 billion. A year earlier, MUFG's earnings plunged 65%, setting up an easy year-over-year comparison.
MUFG stock has a market cap of $121 billion. It holds 11.9 billion shares outstanding as well as 9.27 billion shares of freely traded stock, known as the float.
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.
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Additional Cheap Stocks To Buy And Watch
Alarum Technologies (ALAR) has busted out big gains in recent weeks and should not be chased higher. Watch for a potential new base to form.
This column noted if Alarum holds above 10, that would indicate healthy demand for shares. The IBD Composite Rating is back to an impressive 96 on a scale of 1 to 99.
Other strong movers making the screen include Silvercorp Metals (SVM) on the Amex, ETF manager WisdomTree (WT), homebuilder Comstock (CHCI) (soaring 15% on Thursday in huge volume, rising 3.5% amid Monday's market drop) and Lument Finance Trust (LFT), a real estate investment trust.
Comstock has gushed as much as 37% higher after clearing a 4.85 buy point a flat-base-like structure.
Lument is still trying to clear upside resistance near 2.50.
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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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