Cheap Stocks To Buy: 5 To Watch 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.

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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, may prove 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 the NYSE. So, how can you pick the winners consistently?

Another challenge? 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 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.

Solid, expanding institutional buying makes up the I in CAN SLIM, IBD’s seven-factor paradigm of successful investing in growth stocks.

Which Fast-Growing Large Caps Show Strong IBD Ratings? Check Here

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 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 member of the IBD 50, IBD Sector Leaders, 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. So, how about now? Zoom stock is struggling as it forms a new base and tries to bottom out.

Shares lost buying support at the 50-day moving average on Aug. 11. The company announced second-quarter results on Aug. 30, and quarterly results since then have shown a dramatic growth slowdown. Shares are rebounding lately and trying to bottom out, but not before sinking as much as 86% below their all-time high of 588.

Teladoc roared past an 86.40 proper buy point in mid-January 2020. Seven months later, the stock hit 253, up 193%. Now? TDOC stock continues to live beneath its key 10-week moving average, a bearish sign. Plus, Teladoc, which has crashed 91% below its all-time peak of 308, is also trying to bottom out and build a new base.

So, can you employ the CAN SLIM strategy for cheap stocks to buy as well?

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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.

Check Out IBD Live! Trade Top-Quality Stocks With CAN SLIM Experts And Investing Pros

And don’t forget the No. 1 rule of investing: keep your losses small and under control.

Cheap Stocks To Buy: Idea No. 1

Frontline (FRO), highlighted in this story in recent weeks, surged more than 30% in the week ended May 27. The small cap raced past a new buy point of 9.98 in an 11-week double bottom. But on May 31, shares got pummeled for a 15% loss and tested that new entry. Then Frontline fell 8% below the pivot point, triggering a key loss-cutting sell rule.

At this point, watch to see if the stock can carve out a new base. On the positive side, Frontline has hopped back above its 50-day moving average.

If a cup forms, demand the stock spend at least six weeks developing this bullish chart pattern.

On May 28, Frontline agreed to buy 5.95 million shares in NYSE-listed Euronav (EURN) of Belgium, or almost 3% of the company’s outstanding shares. It will fund this transaction by issuing 8.34 million shares.

FRO has 198 million shares outstanding and a float of 99 million. The market value has eased to $1.8 billion.

The member of IBD’s oil and gas transport and pipeline industry group showed heavy turnover during its breakout week. This hinted fund managers are actively accumulating shares.

The total number of mutual funds owning shares grew in the first quarter, to 255 from 237 at the end of 2021, according to MarketSmith.

The company’s profit record is spotty. Consider these results: net losses of $1.56 a share and 14 cents in 2017 and 2018, earnings of 82 cents and $2.13 in 2019 and 2020, and a net loss of 28 cents last year. Thus, the 25 Earnings Per Share Rating hurts Frontline’s IBD Composite Rating of 79. In general, favor those companies with a 90 Composite or higher. A 95 Relative Strength Rating of 95 is excellent. This means FRO is out-running 95% of all companies in the IBD database over the past 12 months.

However, the Street sees the Bermuda-based operator of oil and oil product tanker ships posting strong earnings this year ($1.13 a share, vs. 86 cents earlier) and next ($1.98, up 75%).

It’s especially vital for traders to buy as close as possible to the proper buy point. Doing so helps limit the possibility of getting shaken out by a normal pullback following the breakout.

In a double bottom, two sell-offs take place. And the second low must always undercut the first low within this classic pattern among growth stocks.

In Frontline’s case, the May low of 7.48 definitely undercut the first low of 7.94 within the base. This highlights a clear shakeout of uncommitted shareholders. Notice how in last week’s 9.4% rally, volume increased vs. the prior week. That’s good.

Frontline got some air play in a recent edition of IBD’s daily Zoom show on investing, IBD Live.

Cheap Stocks To Watch And Buy: No. 2

Screening for top IBD Composite Rating: SunCoke Energy (SXC). From June last year to February, the member of IBD’s coal industry group formed a long base best described as an eight-month consolidation pattern.

SXC used to boast a 95 Composite Rating, but it’s fallen to 86; the 89 Relative Strength Rating has sunk to a mediocre 70.

Notice on a daily chart how back in late February, the stock showed little trouble surpassing upside resistance at 8.

However, a sell-off that began on April 20 sent shares crashing below a key technical level, the 50-day moving average. And now, shares are now failing to keep their head above the 200-day moving average, another key area technical support and resistance.

Another stock will replace SXC soon.

Newpark had been forming the basic shape of a double bottom, but that pattern no longer is in play.

This strong move past 8.13 on March 1 in robust volume constituted a great breakout and a timely buy opportunity. Shares quickly got extended past the 5% buy zone, which went up to 8.54.

Yet a recent steep pullback in crude oil futures, as much as 23% from the early-March peak of $123 a barrel, triggered profit-taking in most energy stocks. So SXC has essentially committed a bearish round trip of recent gains.

At this point, watch for either a rebound off the 10-week moving average or a new base to form. The first and second pullback to the 10-week line can generate a follow-on buy opportunity. And a new base may set up another breakout to new 52-week or all-time highs.

SXC trades 839,000 shares on average each day over the past 50 sessions.

Back in March, the stock’s relative strength line broke a flagging trend in January and has bolted to new highs, another bullish sign.

The Lisle, Ill., company produces coke for the steel industry through mines in both the U.S. and Vitoria, Brazil. SunCoke achieved operating cash flow of $233 million in 2021, exceeding its own revised forecast of $209 million-$224 million. Fourth quarter sales of $365 million grew 18%, and the company turned a profit of 15 cents a share vs. a net loss of 6 cents in Q4 2020.

Strong growth has continued in 2022.

In the first quarter this year, SunCoke achieved a 75% boost in earnings to 35 cents a share on a 22% pick-up in sales to $439.8 million.

Cheap Stocks To Buy No. 3

ICL Group (ICL) belongs to IBD’s agricultural chemicals group. The large cap ($12 billion market value, 1.28 billion shares outstanding) and specialty minerals firm has plowed sharply higher since the fourth quarter of 2020. However, ICL is now forming a new base.

In the week ended Jan. 28, ICL slashed through the 10-week moving average in the heaviest weekly turnover for a down week in nearly two years.

Such negative action provoked a key IBD defense sell rule. However, ICL scored an impressive rebound and retook its 10-week moving average like a true market leader.

The stock is making another test of support at the 10-week line. Meanwhile, the framework for a cup with handle now exists, furnishing a new buy point at 12.63.

ICL maintains a top-drawer 99 Composite Rating. The Relative Strength Rating has faded from 95 to 92, which is still decent.

Since the mid-February rally marks the third rebound off the 10-week line since the initial breakout, it does not serve as a follow-on entry.

In the first quarter of this year, ICL’s earnings vaulted 327% vs. a year ago to 47 cents a share. Sales rose 67% to $2.53 billion. This marked a fifth straight quarter of accelerating growth. The top line rose 14% in Q1 of 2021 and 34%, 49% and 55% in the next three quarters.

In late 2021, ICL replaced Charles & Colvard (CTHR), an expert in lab-produced gemstones. The stock had been forming a long base that could correctly be called a consolidation pattern. Until recently, the proper buy point stood at 3.40, a dime above a near-term high of 3.30 set on Sept. 2. But shares have plunged through the 200-day line.

The plunge by CTHR in recent months reaffirms IBD’s golden rule of investing.

Cheap Stock No. 4

Stock No. 3, screening for top IBD Composite Rating: Enerplus (ERF). The small cap with a $3 billion market value has emerged as a leader within IBD’s Canadian oil and gas exploration industry group. But it’s also joined a decent group of oil explorers that are correctly sharply in price. Enerplus hosts a 98 Composite Rating, still stout. The 98 Relative Strength Rating has fallen only by a notch.

A new base formed through mid-May. For a while, the base carried the elements of a double bottom. Adding 10 cents to the middle peak in between the two sell-offs, or 14.07, and you get a potential entry at 14.17. Shares broke out and at one point marked exceeded a 31% profit in just three weeks or less since the breakout. Targeting that type of gain to the upside was the best call.

But ERF has surrendered all of its gains since past the 14.17 original buy point, forcing new buyers to respect the round-trip sell rule.

In early May, Enerplus reported robust first-quarter results. Earnings soared 233% vs. a year earlier to 60 cents a share. Sales grew 78% to $306.3 million. The strong growth in the top line certainly helped the Canadian firm post an astounding after-tax margin of 47.6%.

Shares, however, have not yet crossed back above the buy point. Rather, like SXC, ERF is trying to stay apace with its rising 50-day moving average.

Enerplus replaced Entravision Communications (EVC), which fell sharply three weeks in a row in November and eventually took out its 10-week moving average in accelerating volume. That ushered a defensive IBD sell signal.

ERF shows a 98 for both the IBD Composite Rating and the RS Rating.

Last year, ERF formed a 13-week cup base with a 7.64 proper buy point from July to September, then broke out beautifully in the week ended Oct. 1. That week saw shares soar 11.6% to new 52-week highs. The 5% buy zone from that 7.64 entry went up to 8.02. The Calgary-based company then went on an eight-week win streak.

In December, Enerplus staged a bullish test of support at the 10-week moving average. A strong bounce off this technical level often offers a secondary entry point. On Dec. 6, ERF acted bullishly, rising nearly 4% and hopping off its 10-week line at 9.43. Again, the first two rallies off the 10-week moving average, following a strong breakout, offer ideal follow-on entry points.

What Is The ‘Correct Buy Point’?

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.

Investor’s Corner: Seven Mental Tips To Help You Beat The Stock Market

Stock Idea No. 5

Amplify Energy (AMPY) (71 Composite, 98 RS) found nice buying support in May at the 50-day line for the first time since its breakout from a cup with handle at 5.04. Until early June, shares kept notching new highs, and the relative strength line scaled new heights.

The first and second tests of either the 50-day line, or the 10-week moving average on a weekly chart, normally offer a secondary buy point after a successful breakout. However, this recent sell-off undercut the 50-day moving average very sharply. Perhaps a new base is in the works. More time is needed for AMPY to bottom out and show new signs of strong institutional demand.

Ownership among mutual funds has not been appreciating lately.

A total 69 funds owned shares at the end of the first quarter, down from 77 in Q3 2021 but up from 62 in Q1 the same year.

Houston-based Amplify targets oil and gas production in the Rocky Mountains, offshore California, Oklahoma and East Texas. The earnings record is spotty lately. Amplify lost money in three of the past four quarters. But sales have grown with vigor.

The top line jumped 129%, 84%, 66% and 54% vs. year-ago levels in the past four quarters. Trailing 12-month sales have now topped $381 million. Amplify also earned 94 cents a share in the fourth quarter last year. Wall Street forecasts earnings soaring 108% this year to $1.75 a share.

Amplifiy replaced Huttig Building Products, formerly trading under the ticker symbol HBP. Huttig announced in late March that it is getting acquired by Woodgrain Inc. Huttig replaced Wipro (WIT); the India-based IT services firm continues to struggle after taking out its 10-week moving average in January.

Want To Find The Best Cheap Stocks On Your Own? Please 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 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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