As the market continues its unpredictable dance between bull and bear phases, the allure of cheap stocks persists for investors seeking potential growth. Whether we find ourselves in a bull market, bear market, or a trend-less market, the quest for stocks that promise substantial gains remains a constant.
The prospect of a stock tripling from $1 to $3 or quintupling from 50 cents to $2.50 is undoubtedly appealing. However, the pursuit of cheap stocks comes with unique challenges and subtle pitfalls that investors should be aware of.
The First Challenge: Identifying Winners Consistently
With hundreds of equities trading at seemingly “low” prices on both the Nasdaq and NYSE, the challenge lies in consistently picking winners. Moreover, most institutional money managers steer clear of cheap stocks, making it challenging for them to accumulate shares without significantly impacting the stock price.
The Second Challenge: Institutional Avoidance of Cheap Stocks
Institutional ownership is a key factor in successful investing, according to IBD’s seven-factor paradigm known as CAN SLIM. However, institutional money managers typically avoid low-priced stocks, focusing on fundamentally strong companies with higher share prices.
Cheap Stocks to Buy: A Pitfall to Avoid
While the allure of penny stocks is undeniable, investors must acknowledge a harsh truth: many low-priced shares stay low for extended periods. This reality poses a risk, as investing in a dollar stock that fails to appreciate significantly may result in missed opportunities with true market leaders.
Lessons from Zoom Video’s Journey
Examining Zoom Video’s trajectory provides valuable insights. In 2020, Zoom emerged as a superstar in the aftermath of the coronavirus bear market. Despite initially trading at an “expensive” price, the company’s quality business, robust sales and earnings growth, and substantial institutional buying justified the premium in its share prices.
However, Zoom’s stock later experienced a significant correction, plunging 90% and enduring a three-year downturn. The stock is currently navigating a new base, highlighting the challenges even successful stocks face.
In conclusion, while the allure of cheap stocks is undeniable, investors must approach them with caution. Identifying consistent winners, understanding institutional dynamics, and avoiding the potential pitfalls of low-priced shares are crucial for long-term success in the dynamic world of stock investing.
It’s essential to be mindful of the liquidity challenges that often accompany cheap stocks, potentially leading to less-than-ideal trade executions. Thin trading volumes can pose difficulties when exiting a position, especially if large amounts of shares are being sold by fund managers looking to secure profits.
To mitigate potential challenges, investors should pay attention to the bid-ask spread, the gap between the best bid and best ask prices. A smaller gap indicates less price slippage, enhancing the trading experience.
The No. 1 Rule: Manage Losses
Before delving into specific stocks, it’s crucial to emphasize the golden rule of investing: keep losses small and under control. Now, let’s explore five cheap stocks that have caught the attention of the IBD Stock Screener.
1. Crexendo (CXDO): A New Networking Leader?
Crexendo is a relatively new entrant to the IBD Stock Screener, showing promising signs. Recently, the stock experienced a notable surge, with shares jumping over 10% on November 15, accompanied by a 155% increase in trading volume compared to the 50-day moving average. While the stock is currently too extended for a new buy, its positive price-and-volume action has transformed its daily chart.
Crexendo, a micro-cap company with a market value of less than $100 million, specializes in providing e-commerce technology and related training to small and medium businesses. With revenue exceeding $50 million over the past four quarters and impressive earnings per share growth, Crexendo boasts a Composite Rating of 96.
2. Cipher Mining (CIFR): Forming a Base Amid Volatility
Cipher Mining has witnessed significant volatility but continues to form a base. While the stock reported earnings of 2 cents per share in the third quarter, it is yet to surpass a proper buy point. Investors are advised to observe how the stock handles potential overhead supply and monitor for the formation of a new base.
The company, contributing to the Bitcoin boom, helps develop and operate Bitcoin mining data centers in the U.S. Cipher’s newfound profitability has elevated its EPS Rating to 81, with an anticipated earnings growth of 103% in 2024.
3. Kinross Gold (KGC): Rebounding Amidst Gold Price Fluctuations
After a sharp drop due to declining gold prices, Kinross Gold is making a strong comeback. The stock is approaching a potential breakout at $5.57, displaying a cup-with-handle pattern. Despite recent volatility, Kinross’s solid fundamentals, including strong earnings and sales growth, contribute to its Composite Rating of 94.
4. Heritage Insurance (HRTG): Defying Market Declines
Tampa-based Heritage Insurance has defied the market’s recent decline throughout the year. The stock’s resilience is evident, with shares holding above $6 and clearing a cup pattern with a $6.70 buy point. Heritage Insurance specializes in offering residential insurance for single-family homes and condominiums in Florida, with improving financials and strong top-line growth.
5. Cellebrite DI (CLBT): Specialty Enterprise Software Play
Cellebrite DI is breaking out of an 11-week base with an $8.29 alternate entry, staying within the 5% buy zone up to $8.70. The stock has demonstrated impressive performance since June and recently delivered strong Q3 results. Investors should be aware of a defensive sell signal if the stock loses support at its 10-week moving average.
As with any investment, it’s crucial for investors to conduct thorough research, consider risk management strategies, and stay informed about market trends. These affordable stocks offer potential opportunities, but prudent decision-making is key to navigating the dynamic world of stock investing.
