Cheap Stocks To Buy: Should You Watch These 5 Growth Stocks?

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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.

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

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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 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 and testing buying support at the 50-day moving average. Last month, ZM joined SwingTrader as a new position.

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 trying to climb back above its key 50-day moving average, a critical technical level of medium-term price support and price resistance. 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 20%. Adobe has been a mainstay on the IBD Long-Term Leaders.

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.

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.

Stock No. 1, screening for top IBD Composite Rating: 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 that highlights an 8.42 proper buy point. Now, WIT has cleared this correct entry.

Buy With Rules

The 5% buy zone goes up to 8.83. WIT rose 2% to as high as 9.10 in the early going Monday, so it's jumping out of the ideal buy range.

The Composite Rating remains superlative at 97 on a scale of 1 (wizened) to 99 (wizardly). WIT also stands out with a 90 Relative Strength Rating. A 94 RS Rating means Wipro has outrun 94% of all companies in the IBD database over the past 12 months.

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.

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Cheap Stock No. 2

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.

Three weeks ago, the stock made a sound first test of buying support at the 10-week moving average near 5.62. In the past week, EVC pulled back hard and eyed another test of institutional support near that 10-week line, which has now risen to around 6.34.

Buying shares as close as possible to the 10-week moving average amid a healthy rebound offers the intrepid trader a secondary buy point.

Entravision's IBD ratings include an 86 Composite, which is below a preferable level of 90 or higher; 98 Relative Strength; an up/down volume ratio of 1.5; and back to a solid A- for Accumulation/Distribution. The stock also pays a dividend; due to recent strong price gains, the annualized yield has dropped to 1.6%.

Strong gains this week could boost EVC's IBD ratings.

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.

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.

Premium IBD Ratings Galore

Stock No. 3, screening for top Composite Rating: Loma Negra (LOMA). The Argentine cement, concrete, aggregates and lime supplier posted a 500% jump in first-quarter earnings vs. a year earlier to 24 cents a share. Sales accelerated to a 37% gain to $143 million, according to MarketSmith. The IBD relative strength line bolted to new 52-week highs recently.

Loma Negra briefly pulled back into the 5% buy zone after clearing a base-on-base pattern at 6.79. The buy zone goes up to 7.13. However, like other commodity stocks, LOMA has fallen sharply in recent days.

In short, don't chase the stock. Good time to wait and watch.

Loma's Composite Rating has fallen to a less savory 68 rating. The 86 RS Rating is good but not great anymore.

An 86 RS score means over the past 12 months Loma has outperformed 86% of all companies in the IBD database.

A Former Huge Winner In Apparel Retail

Stock No. 4, screening for top Relative Strength Rating: Chico's FAS (CHS). The former leader of IBD's retail apparel and shoes industry group is continuing to make a test of the 10-week line after clearing a cup-without-handle base in March at 4.22.

The first and second rallies off the 10-week line — near 5.76 during the week ended July 23 — after a strong breakout pose as secondary entry points.

Due to the recent pullback, it's now beginning to look as if CHS will form a new base.

Among cheap apparel stocks to buy, Chico's sports a top-drawer 99 RS Rating. This means its relative strength is top-notch. Put another way, CHS has outperformed 99% of all companies in the IBD database over the past 12 months.

On the fundamentals side, at least eight quarters in a row of net losses by the Fort Myers, Fla., firm weigh on the drab 71 Composite Rating. But sales rebounded 38% in the April-ended fiscal first quarter to $388 million. According to Yahoo Finance, one analyst thinks Chico's will post a net loss of 4 cents a share in the July-ended second quarter; another analyst targets an 11-cent loss. The women's apparel chain lost 40 cents a share in the year-ago quarter.

The consensus forecast calls for a 33% jump in the top line, however, to $407.4 million. Look for Q2 results in late August.

Chip Leader Stumbles

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 offers 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. But UMC has retreated sharply. On the bright side, UMC is holding above the key 10-week moving average. And it remains mildly above the 9.92 breakout point.

A key rule is to never let a stock that shows a double-digit percentage gain turn into a full round trip — even among cheap stocks.

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 (95) and Relative Strength Rating (95); however, these ratings are best used for selecting stocks to buy, not for timing any entries or exits.

UMC holds a best-possible A grade for the SMR Rating, which measures sales, margins and return on equity.

A Strong Second Quarter

United Micro reported robust second-quarter results on July 28. 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. The company exceeded both analysts' views with profit of 18 cents a share, doubling the 9 cents it earned a year earlier.

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.

More Trading Ideas

Several weeks ago, these two cheap stocks made either the "Accelerating Sales" or "Top Relative Strength Rating" segment of IBD Stock ScreenerDynavax Technologies (DVAX) and JMP Group (JMP).

Both stocks move sharply week to week, yet are respecting a key technical support level, the 10-week moving average.

JMP cleared a 6.45 buy point in a four-month cup with handle. However, the handle formed near the middle of its cup pattern. You'd prefer to see the handle begin forming when a stock has climbed to within 5%, 10% or possibly 15% of its 52-week high.

Notice how JMP still trades below the cup's left-side peak of 7.30 and its 52-week peak of 8.99.

Dynavax is retreating fast after a big breakout past a cup with handle and a 10.45 entry point. Shares are still extended past the 5% buy zone after clearing 10.45.

Please follow Chung on Twitter: @saitochung and @IBD_DChung


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