Take a Look at Some Low-Priced Wonders - TheStreet

Editor's Note: Alan Farley's column runs exclusively on RealMoney.com; this is a special free look at his column, which focuses on a technical approach to swing trading. Although the stocks mentioned below aren't value stocks in the traditional sense, they do represent opportunities to watch out for in low-priced stocks. For a free trial subscription to RealMoney.com, click here. This article was published May 7 on RealMoney.

Everyone is looking for a bargain these days. Whether it's hunting for spring clothing or replacing that cranky old mower, no one wants to pay retail when they can get it on the cheap. And why should they? We've built a legion of superstores, warehouse centers and under-a-buck outlets just to satisfy our urge for the blue-light special.

So it goes with equities. Bull market fever pushed valuations through the roof and brought value investing down to its knees. Then the new millennium came along and cleaned house. We discovered that what goes up does indeed come down, and that our meal tickets to early retirement had been cooking the books.

We've been looking for stock bargains once again, and we're finding them. Low-priced stocks are having their best run in years and finding eager investors ready to hitch a ride on the next

McDonald's

(MCD) - Get Report

or

Wal-Mart

(WMT) - Get Report

. But you need to be patient with these small wonders, because they're low-priced for a reason. They could be poorly capitalized, have an inadequate business plan, or even be working off a hangover from much better times.

Welcome to the new age of speculation, where risk gets rewarded and buy-it-and-forget-it is a thing of the past. Pull up a chair and let's take a look at a few market midgets. You just might uncover some household names for the next decade.


Source: TC2000

Sonic Solutions

(SNIC)

has had quite a run over the last five months. It broke out of a two-year base and rose 400% before pulling back in a broad ascending triangle. This broad pattern is quite bullish for another move up. But note the old high over $12. Keep that level in mind for taking profits, because it can mark strong resistance that may not get broken for many months.


Source: TC2000

dELiA*s

(DLIA)

is a small member of the strong retail sector. DLIA is also showing a bullish ascending triangle. But this chart is a bit different from Sonic Solutions'. It reveals no resistance levels until the low $20s. Since DLIA is only a $7 stock, this suggests a position taken on the next breakout could have excellent reward potential. Be patient, though. It could take months for the stock to reach those lofty levels.


Source: TC2000

Could

Back Yard Burgers

(BYBI)

be the next McDonald's? For those too young to recall, Mickey Ds offered fabulous returns during the '80s and early '90s. So could this Tennessee upstart fill Ronald's big shoes? It's too early to tell, but its char-broiled burgers have investors coming back for more. The restaurant chain's stock is at an all-time high in a 16-month rally that shows no signs of losing its sizzle.


Source: TC2000

Merge Technologies

(MRGE)

broke above its bubble high earlier this year. It then began a pullback that is slowly nearing support. This price level could offer investors a low-risk opportunity to buy into this health technology provider. Since MRGE is near a new high, it has no overhead resistance right now. This should give it a chance to run strongly, after the pullback is complete.


Source: TC2000

How can we look at small stocks without highlighting a recovery candidate or two?

Danka Business Systems

(DANKY)

fits the bill as a stock that's seen better days. DANKY peaked over $50 in the mid-'90s and began a painful three-year downtrend. It actually found a bottom and started to rise well over a year ago. But the previous beating was so severe, it's taken all this time for the stock to break through the long-term downtrend line. DANKY finally has the wind at its back, and it may recover at a more rapid pace in the months ahead.


Source: TC2000

La Quinta

(LQI)

is a good choice for trading cowards. It's actually a fast-moving REIT, which means it still moves a lot slower than most other single-digit stocks. This lets you take a position and also sleep at night. LQI has done a price double since last September's lows, and looks like it's still in the early stages of a major recovery.

Alan Farley is a professional trader and author of

The Master Swing Trader

. Farley also runs a Web site called

HardRightEdge.com, an online resource for trading education, technical analysis and short-term investment strategies. At the time of publication, Farley had no positions in any of the stocks mentioned in this article, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Farley appreciates your feedback and invites you to send it to

Alan.Farley@TheStreet.com..

Also,

click here to sign up for Farley's premium subscription product The Daily Swing Trade brought to you exclusively by TheStreet.com.

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