Harry Domash's Winning Investing

Cheap Growth Stocks (Under $10)

With the market basically going nowhere these days, there should be plenty of bargains around. In fact, the last time that I checked, 1,499 stocks were trading for under $10 per share.

With so many to cheap stocks to choose from, you’d think that there’s easy money to be made. After all, if you pick up a stock for $6 or $7, it wouldn’t be unreasonable to expect a double if the market takes off. It’s hard to imagine scoring such a gain from Apple or Netflix.

Earnings Growth Moves Stocks

Unfortuneately, most cheap stocks got that way for a reason and will never move up. Nevertheless, the market rewards growth, especially earnings growth, so you stand a good chance of making profitable trades if you pinpoint stocks likely to outperform by that measure.

Here’s a stock screen I devised using the free and user friendly Finviz stock screener for finding such stocks. That is, stocks changing hands for under $10 with strong earnings growth potential. First, I’ll describe the screen so you can run it yourself, and then I’ll list the stocks that it listed when I ran it.

Setting Up the Screen

Start from the Finviz homepage (finfiz.com) and then select “screener.” Finviz uses “filters” to define the screening search parameters. Select “All” to see all available filters. Use the dropdown menu next to the name of each filter that you want to use to set up your screen.

Start by specifying “USA” for Country and “under $10” for price to limit your screening universe to U.S.-based stocks trading under $10.

Search for Fast Growth

Next, use analyst forecasts to limit your list to stocks expected to grow earnings at least 10% this year (EPS growth this year) and 15% next year (EPS growth next year).

Long-term, earnings growth requires sales growth. Since Finviz doesn’t have sales growth forecasts, require at least 15% sales growth in the last quarter (Sales growth quarter over quarter).

Cut Risk

Because very small firms add excessive risk, use the Market Cap filter to require a minimum $300 million market-capitalization (value of outstanding shares) by selecting “+ Small.”

Work Smarter

Rather than doing the analysis yourself, piggyback on the efforts of the pros by requiring Analyst Recommendations of “Buy or better” and “over 50%” Institutional Ownership. Institutions are mutual funds and other big investors. Avoid stocks if these “in the know” players don’t hold at least 50% of outstanding shares.

Trend is Still Your Friend

Stocks that have already started moving up in price are your best bets to continue their winning ways. Use the 200-day Simple Moving Average filter (Price above SMA) to limit the field to already uptrending stocks.

Profits Count

You’ll always do best by sticking with profitable firms. The price earnings valuation ratio can only be positive if earnings are positive, so use the PE ratio filter (P/E) and specify “Profitable.”

Three Stocks Qualified

Surprisingly, the screen only turned up three stocks when I ran it.

  • BGC Partners (BGCP): Stock brokerage firm operating globally that is expected to grow earnings 18% this year and 16% in 2017.

  • NewStar Financial (NEWS): Commercial finance company that is expected to grow earnings 68% this year and 27% in 2017.

  • Park Sterling (PSTB): Regional bank operating in the Carolinas, Virginia and Georgia, that is expected to grow earnings 25% this year and 16% next year.  

Here's a link to the screen so you can see which stocks it's turning up today.

Consider the results of my screen to be research candidates, not a buy list. The more you know about your stocks, the better your results.

Published 6/3/16

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