Bull market or bear market? Or a trend-less market as seen for weeks until news late last month that political leaders on both sides of the U.S. chambers of Congress reached a deal to raise the debt ceiling? 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.

Imagine a large-cap mutual fund trying to buy a meaningful stake 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 shares. They tend to already trade at 20 or 40 a share before they 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, IBD’s seven-factor paradigm of successful investing in growth stocks. The I stands for institutional ownership.

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Cheap Stocks To Buy: Avoid This Pitfall Too

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, 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 six-fold 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 now lasted more than three years. ZM continues to try building a new base and bottoming out. ZM is also still trying to climb resolutely above the 200-day moving average.

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 in this manner.

A new base continues to develop. Zoom is aiming at a fourth up week in a row, and that’s bullish.

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5 Cheap Stocks To Watch And Buy

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.

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

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

Cheap Stocks To Buy, No. 1: A New Networking Leader?

Among top cheap stocks to buy, Crexendo (CXDO) is relatively new to the IBD Stock Screener. The stock has soared to new 52-week highs after light pullbacks earlier in the month, yet still deserves close watch.

On Nov. 27, shares jumped 7% in massive turnover, 616% above the 50-day average. CXDO also rose for a fifth straight session. Plus, shares either rallied or finished unchanged for the 11th time in 12 trading days.

As noted in this column in November, shares catapulted more than 10% higher on Nov. 15. Volume ran 66% above normal levels as of mid-afternoon trading. By day’s end, volume jumped 155% above the stock’s 50-day moving average. This burst of volume signaled demand rose sharply.

Crexendo proceeded to blast out of its two-month cup without a handle with a 2.55 entry point. Now that it has thrust more than 36% past that proper buy point, the stock is too extended to buy.

Please read more about the 5% buy zone rule in this IBD Investor’s Corner.

Since an IBD Day 4 follow-through day took place on Nov. 1, CXDO’s positive price-and-volume action has totally changed the complexion of the daily chart.

CXDO stock has come a long way off its near-term low of 1.54, which is the bottom of the cup recently formed. Crexendo spent six weeks carving the left side of its cup pattern. Then the right side of the cup — the term “cup” is used in referring to the silhouette of a tea cup viewed from its side — has formed quickly.

A new buy point emerged at 2.55, or in this case, simply the left-side peak within the cup base.

The company, a true micro cap with 26 million shares outstanding and a market value of less than $100 million, sells ecommerce technology and related training to small and medium businesses. Revenue over the past four quarters topped $50 million. And the top line grew 27%, 53%, 43% and 52% vs. year-ago levels over the past four quarters.

Earnings per share strengthened to 9 cents, 2 cents, 4 cents and 12 cents over the same time frame. Year over year, earnings grew 100% or higher in three of those four quarters.

For these reasons, Crexendo boasts an improved 97 Composite Rating.

The SMR Rating, which analyzes sales, profit margins and return on equity, is positive at B on a scale of A to E.

You can evaluate any company’s Sales + Margins + Return on Equity Rating via a stock quote by typing in the ticker in the search box at Investors.com or at IBD Stock Checkup.

The Tempe, Ariz., firm is clearly desiring to halt a multiyear downtrend. Shares still reside way off a multiyear high of 12.78 seen in August 2020.

So, this column will continue monitoring CXDO stock for a potential follow-on entry or when a brand new base develops another primary buy point.

The above monthly chart highlights how Crexendo struggled to rise past 8 back in the fourth quarter of 2020 and in early 2021.

Cheap Stocks To Buy, No. 2

Cipher Mining (CIFR) fell sharply in early November after rising three weeks in a row. The stock has gotten extremely volatile and tested support multiple times near the 200-day moving average. CIFR has strengthened in the past few weeks.

On Tuesday, the stock rushed past an early entry at 4.27 on Tuesday. It’s gotten extended from the aggressive buy point. CIFR has also breached the left side of its deep base, which resembles a proper double-bottom pattern. However, Cipher’s base has at least one flaw: During the recent sell-off to a low of 2.29, Cipher did not undercut the initial sell-off low of 2.25 seen in late September.

On Nov. 8, the company reported earnings of 2 cents a share in the third quarter vs. a net loss of 7 cents a year earlier. Cipher posted sales of $30.3 million.

In the week ended Oct. 27, shares ran almost 28% higher, then during the week ended Nov. 3, CIFR surged 23% before the very sharp pullback. In both cases, weekly volume jumped above the stock’s 10-week average.

Amid this advance, Cipher actually did not surpass a proper buy point. Cipher Mining, however, has seen a bullish change in character after rapidly finishing the right side of a new base.

Earlier this month, this column suggested watching to see how the stock handles a potential overhead supply of willing sellers near 4. Given the sharp pullback in the week ended Nov. 10, CIFR at first did not handle this test well. But it eventually formed a deep cup without a handle. The pattern offers a 5.30 buy point.

This column also noted in early December that a trendline entry near 3.70-3.90 may also emerge. CIFR shares have surged past this early buy point.

Bitcoin Boost

Earlier this month, the Bitcoin digital currency soared to as high as $34,996, extending a year-to-date gain to 106%.

ProShares Bitcoin Strategy (BITO) has also continued to gain ground. The exchange traded fund is aiming at a fourth straight monthly advance. It has also run up more than 73% from the 12.79 low of its latest consolidation pattern.

New York-based Cipher helps develop and operate Bitcoin mining data centers in the U.S. Cipher posted revenue of $3 million, $21.9 million and $31.2 million in the past three quarters. In Q1 and Q2 of this year, the results landed the company in the black as Cipher earned 3 cents and 4 cents a share, respectively.

That compares favorably with a net loss of 26 cents a share in all of 2022.

Currently, Wall Street sees earnings of 13 cents this year and 27 cents in 2024, up 103%. Both EPS estimates got shaved recently.

The newfound profitability has boosted Cipher’s EPS Rating to an 81 on a scale of 1 to 99. A 98 Relative Strength Rating also contributes to CIPH’s overall Composite Rating, but this rating has dropped to 84 from 91 recently.

Gold Miner And Processor Rebounds With Fury

Third among cheap stocks to buy and watch: Kinross Gold (KGC) joined IBD Stock Screener after achieving a 94 Composite Rating on a scale of 1 to 99. This rating has edged up to 96. The Relative Strength Rating of 90 had shrunk to a 59, a highly negative sign. But the RS score has bounced back to 90.

KGC shares continue to act well, aiming at a sixth weekly gain in seven weeks.

Meanwhile, gold futures recently traded at $2,057 per ounce. Watch to see if Kinross can hold gains after rising for a third straight week.

A sharp drop in gold prices from September to early October weighed sharply on the stock. In turn, KGC plunged below its key 200-day moving average. So, this article noted at the time that the stock was going to get replaced.

However, the stock has made a remarkable comeback as gold futures have rebounded to $2,090 an ounce. As a result, Kinross shares have driven past a breakout point at 5.57, produced by the base’s left-side high. Shares are now extended past the 5% buy zone, which goes up to 5.85.

KGC shares had been forming a new base after topping in early May at 5.57. Since then, Kinross kept a tidy decline. At the base’s low of 4.32, KGC corrected all of 22% from high to low.

One could also argue that the base featured the elements of a cup with handle, featuring a 5.50 entry point. The 5% buy zone went up to 5.78; a pullback to this level could deliver a second chance to buy shares while it’s not far extended.

Premature Breakouts Happen Too

An early entry point emerged near 5.23; KGC briefly surpassed the early buy point on Sept. 18. However, even early entries are not failsafe; the stock quickly nose-dived 17% below the 5.23 pivot point. That bearish action triggered the golden rule of investing.

Analysts on consensus see Kinross posting earnings of 40 cents a share this year, up 80%, then dipping 4% to 38 cents in 2024.

The company has shown terrific fundamentals. Kinross’ earnings grew 400%, 350%, 40%, 367% and 140% vs. year-ago levels over the past five quarters. Sales picked up 47%, 75%, 33%, 33% and 29% over the same time frame. And in the just-reported third quarter, return on equity improved to 8.5%.

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 long-time 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 it shows a confirmed uptrend.

Cheap Stock No. 4: Insurance Play Emerges

Tampa-based Heritage Insurance (HRTG) has defied the market’s latest decline for pretty much the entire year. For instance, shares roared 16% higher on Sept. 26 in the heaviest turnover so far in 2023.

But shares have recently nose-dived through the 10-week moving average in a heavy volume. That action triggered a classic defensive sell signal. Numerous insurance stocks have also undercut their 10-week lines, a key technical level.

At this point, Heritage could be sold to preserve profits.

Watch to see if the stock can rebound and form a new base as well.

The stock continues to soar and is hyper-extended from any IBD-style entry for now.

Watch to see how it handles the 10 price level. HRTG topped after carving out a large cup with handle from August 2020 to April 2021. However, a breakout past the 12.20 buy point, or the highest price within the handle, never materialized.

Notice on a daily chart how back on Aug. 9, the stock jumped past a 4.86 buy point in a 12-week cup with handle and quickly gained more than 25% in the span of five days. However, amid the August stock market pullback, HRTG quickly surrendered all of that juicy advance.

For a couple days, the stock dwelled below the key 50-day moving average. Buying then picked up across the insurance sector. Heritage was no exception.

At this point, HRTG is still sharply extended past the original 4.86 pivot point, this column noted that a new base might form.

This column also suggested readers to watch for potential stiff upside resistance near 6 for the stock.

Amid a new confirmed uptrend in the stock market, without question the best time to be actively constructing a watchlist of top stocks and risk at least some money on new breakouts, Heritage shares have cut through that price resistance like a hot knife through butter.

Shares held up well above 6, a positive sign. They also cleared a narrow yet symmetrical cup pattern that offered a 6.70 buy point.

Keep in mind that a typical cup must form over at least six weeks. So, buying shares on this latest breakout attempt carried higher risk.

The company offers residential insurance for both owners of single family homes and condominiums in Florida. Amid a strong rise in premiums across the industry, Heritage Insurance is also seeing top-line growth accelerate.

Insurer’s Fundamentals Accelerate

In the third quarter of 2022, revenue edged 1% lower to $165.5 million. Then revenue picked up 5%, 12% and 13% in the next four quarters through Q3 of this year.

Profits have also jumped sharply, going from a sharp net loss of $1.83 a share in Q3 2022 to strong gains the next three quarters. In the second quarter of this year, profit rose 191% to 32 cents a share. But the company posted a net loss of 28 cents in Q3.

Hurricane Ian, which devastated parts of Ft. Myers, Sanibel Island and the surrounding Gulf Coast area, made landfall on Sept. 28 last year. That disaster blew a big hole through the company’s profitability in that quarter.

On Aug. 8 this year, the company reported a third consecutive quarter in which its net combined ratio, a measure of operating costs, held below 100%.

CEO Ernie Garateix noted that the company took action to make “significant rating actions,” improve its underwriting operations, and engage in “selective organic growth” of its commercial residential business to boost the quality of its insurance book. Heritage also raised its average premium by 24% vs. a year earlier.

Heritage Insurance stock has raised its average daily volume even further to 502,000 shares. It has a market value of $201 million and 30.3 million shares outstanding.

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Cheap Stocks To Buy, No. 5: Specialty Enterprise Software Play

Finally, among cheap stocks to buy and watch, Cellebrite DI (CLBT) is still moving sideways after clearing a nearly 11-week base with an 8.29 alternate entry. Shares remain in the 5% buy zone. which goes up to 8.70.

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.

Now, CLBT has constructed 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. The move past 7.79 in heavy volume Tuesday following excellent Q3 results points to a new breakout from an early entry.

The 5% buy zone goes from 7.79 to 8.18. So, Cellebrite has surpassed the 5% zone from this lower buy point.

In recent weeks, CLBT has also delivered a defensive sell signal: Take gains when a stock loses support at its 10-week moving average. Shares have corrected 18% from the 52-week peak of 8.29.

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 also highlights a more than 100% gain since shares bottomed out at 3.80 in October 2022.

Meanwhile, 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. Earnings in the second quarter jumped to a nickel per share vs. a penny loss a year ago as sales increased 23% to $76.7 million. That marked the strongest top-line increase in five quarters. In the prior four quarters, sales rose 6%, 9%, 9% and 14% vs. year-ago levels.

Small cap Cellebrite DI has a market value of $1.6 billion and 197.4 million shares outstanding.

The 92 RS Rating has fallen a few notches yet is still good. Cellebrite DI hosts a solid 92 Composite Rating, yet companies with a 95 Composite tend to do better, based on IBD research.

Additional Cheap Stocks To Buy And Watch

More recently, IBD Stock Screener has captured these names that show good Composite Ratings: Journey Medical (DERM), Bitfarms (BITF) in IBD’s financial software industry group, and VersaBank (VBNK) of Canada.

VersaBank peaked at 9.02 in late July, then began sculpting a new shallow cup base with a mild correction of just 20% from high to low. In the week ended Dec. 15, VBNK bolted past a 9.02 entry point in that cup in massive volume and quickly got extended past the 5% buy zone (up to 9.47).

Want To Find The Best Cheap Stocks On Your Own? 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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