Five Single-Digit Plays With Big Potential
I stopped looking at single-digit stocks a few months ago because they were getting hit too hard in the falling market. But this unique category is on the mend these days, as speculation makes a timely reappearance on Wall Street. So let's pull up a basket of small wonders and see what's attracting buying interest.
These stocks are cheap for a reason, so do your homework before risking capital in this corner of the market. Also keep in mind that most small companies aren't profitable and don't have a ton of money in the bank. This increases the likelihood they'll knock down the value of your holdings through secondary offerings that dilute outstanding shares.
Those untimely announcements can kill great patterns in a single session and trigger substantial losses. The best way to manage this additional risk is to keep your position size small and place tight stop losses. It also helps to shorten your holding period and take aggressive profits as soon as the stock approaches an obvious resistance level.
Cheap stocks come in two varieties. First are beaten-down companies that have fallen from great heights at the expense of unhappy shareholders. Second are emerging small-caps, which have weak balance sheets but prospects for rapid growth. This latter category tends to perform better because it's free from selling pressure at higher price levels.
OK, enough said. Let's look at five little guys that could move higher in coming weeks.
Valence Technology (VLNC) |
Source: eSignal |
Valence Technology
(VLNC)
dropped from $40 to 45 cents in a bear-market decline that ended in 2002. The subsequent bounce failed just above $6, with price entering a steady downtrend that bottomed out last summer. The battery maker has charged higher since that time, with a sharp rally that's lifted price to a three-year high.
The stock has been pulling back from its March peak for the last six weeks. Underlying accumulation has stayed healthy through this grinding pullback, and it now looks like the small double pattern at $2.75 will mark the corrective low.
This support sets the stage for a strong recovery that lifts price up and through the most recent high.
Celestica (CLS) |
Source: eSignal |
Celestica
(CLS) - Get Report
has declined steadily in recent years after a millennium run up to $87. The stock posted a 10-year low in January and has been on the recovery trail since then. The upside accelerated in late April after the company reported surprisingly strong earnings, and that buying spike lifted price into a four-year trend line.
This is a great setup, but it's foolish to jump the gun with an early position considering this stock's troubled history. Instead, wait for price to gather enough sponsorship to break above multiyear resistance and prove that the current uptrend is sustainable. A breakout above $10 should do the trick and support a follow-through rally into the mid-teens.
Brigham Exploration (BEXP) |
Source: eSignal |
Brigham Exploration
( BEXP) is a Texas-based oil and natural gas developer. It rallied to an all-time high at $14.65 in 2005 and entered a steep decline that bottomed out near $4 in August. The stock has traveled a ragged path since then, with a quick burst to higher ground, followed by a series of gut-wrenching whipsaws.
Price has steadied its course recently and pushed up to intermediate resistance at round number 10. The stock has been congesting in a tight pattern at this level for the last three weeks and now looks set to break out. It's scheduled to report earnings after Tuesday's close, so that news might be the triggering event.
Metallica Resources (MRB) |
Source: eSignal |
Metallica Resources
( MRB) is a single-digit stock that's currently trading near an all-time high. This is a Central and South American precious-metals producer that's benefiting from the historic rally in gold and silver. The good news is that price movement is less dependent on fluctuations in the futures markets than its blue-chip cousins.
The miner peaked at $7.23 in mid-April and has been pulling back since. It tagged five-month support near $6 last week and bounced firmly. However, I doubt the stock will go straight up from here. It's more likely that we'll see a quiet back-and-fill period that retests support and builds a sturdy base ahead of a sharp run to new highs.
LaBranche and Co. (LAB) |
Source: eSignal |
LaBranche and Co.
( LAB) is an
NYSE
specialist firm that got pummeled by the exchange's transition to electronic processing. But the specialist system isn't dead yet, and this stock is on the comeback trail. Notably, it dropped through two-year support last September, moved sideways for seven months and then burst higher in late April.
This price action has triggered a long-term
2B Buy
signal, which denotes the failure of a breakdown at a critical low. It's a contrary reading that predicts the recovery will continue in coming months. The next resistance level on the longer-term view lies near $8.50, so traders should lock in profits as soon as price approaches that barrier.
Alan Farley provides daily stock picks and commentary with his "Daily Swing Trade" newsletter.
At the time of publication, Farley had no positions in the stocks mentioned, although holdings can change at any time.
Farley is also the author of
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