To The Moon

Bull market, bear market, or trend-less market? Regardless ofwhat 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 upthe I in CAN SLIM, IBD's seven-factor paradigm ofsuccessful investing in growth stocks.

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 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 atrue stock market leader in Leaderboardor a member of theIBD 50, theLong-Term Leaders, orIBD Big Cap 20.

Let's considerZoom Video(ZM) and telemedicine pioneerTeladoc(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 adeep cup baseat 107.44 in February 2020, went on to rise nearly sixfold to its 2020 peak at 588. Today? Zoom stock is forming anew baseand testing buying support at the50-day moving average. Last month, ZM joinedSwingTraderas a new position.

Teladocroared past an 86.40proper buy pointin mid-January 2020. Seven months later, the stock hit 253, up 193%. Today? TDOC stock is trying to climb back above its key50-day moving average, a critical technical level of medium-term price support and price resistance. Like Zoom, Teladoc is also deep in the weeds ofbuilding a new base.

Zoom And Teladoc Aren't Alone

Leaderboard memberAdobe(ADBE) cleared a 157.99 entry in afive-week flat basein 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 anothernew breakoutpast anew buy point, this time at 525.54.

ADBE stock has rallied sharply, gaining more than 20%. Adobe has been a mainstay on theIBD Long-Term Leaders.

Still, can you employ theCAN SLIM strategyfor cheap stocks to buy as well?

5 Cheap Stocks To Watch And Buy

TheIBD Stock Screenerfilters 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.

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

Stock No. 1, screening for top IBDComposite 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 aflat basethat highlights an 8.42proper buy point. Now, WIT has cleared this correct entry.

Buy With Rules

The5% buy zonegoes up to 8.83. So, WIT is on the verge of jumping out of the ideal buy range.

TheComposite Ratingremains superlative at 97 on a scale of 1 (wizened) to 99 (wizardly). WIT also stands out with a 90Relative 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 thecorrect 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.

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 4.52entry pointin surging volume during the week ended May 21.

Three weeks ago, the stock made a sound first test of buying support at the10-week moving averagenear 5.62. Yet this week, EVC is pulling back hard and eyeing another test of institutional support near that 10-week line, which has now risen to 6.34.

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

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

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.

Premium IBD Ratings Galore

Stock No. 3, screening for topComposite 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 toMarketSmith. TheIBD relative strength linebolted to new 52-week highs recently.

Loma Negra briefly pulled back into the5% buy zoneafter clearing abase-on-base patternat 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'sComposite Ratinghas fallen to an unsavory 69 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 topRelative Strength Rating:Chico's FAS(CHS). The former leader of IBD's retail apparel and shoes industry group is continuing to make atest of the 10-week lineafter clearing acup-without-handle basein March at 4.22.

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

Due to the recent pullback, it's now beginning to look as if CHS will form anew 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 69Composite 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. Anew baseoffers an earlyentry pointat 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 the5% 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 9.92breakout point.

A key rule is to never let a stock that shows a double-digit percentage gain turn into afull 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 bothComposite Rating(94) and Relative Strength (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 theSMR Rating, which measures sales, margins andreturn 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 ofIBD Stock Screener: Dynavax Technologies(DVAX) and JMP Group(JMP).

Both stocks move sharply week to week, yet are respecting a key technical support level, the10-week moving average.

JMP cleared a 6.45buy pointin afour-month cup with handle. However,the handleformed 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 acup with handleand a 10.45entry point. Shares are still extended pastthe 5% buy zoneafter clearing 10.45.