Trading $10 and Under Stocks
I really enjoy trading stocks that are $10 and under. Often they
provide the chance to enjoy high percentage gains and, of course, at
worst, the risk is limited to what I paid for the stock. In almost all
circumstances the real potential loss would be much less than that
because I would have an early exit in place in case the stock turned
against me. If you read my recent article that dealt with reward to
risk ratios, you can see how a less expensive stock might present a
great opportunity.
Ordinarily, if you are a fundamental trader you wouldn't be crazy
about a cheap stock. Often, they are cheap for a reason, but don't
think that the reason is always bad. Many times a cheaper stock won't
even have a P/E (price to earnings ratio). When there is no P/E, that
means there were no earnings. Remember your middle school math --
anything divided by zero equals zero. There may be an excellent reason
why a stock has no earnings. It may have an important product in
development and has had to spend revenue and borrowed money on research
and development.
Just because a stock is cheap doesn't mean a trader can't make
money trading it. Don't confuse a good company with a good stock.
Let's look at some truly great companies and see how their stocks have
performed over the last couple of years. Merck (MRK), for example,
traded around 48 in June of 2004; in early March of 2006 it was around
35. 3M Company (MMM) hit 90 in June of '04 and was below 74 in March of
'06. Pfizer (PFE) was over 37 in April 2004 and was $11 lower in March
of '06. DuPont (DD) hit 54 in March 2005, but a year later it got down
almost to 40. From July of '05 until March '06 Intel (INTC) dropped a
full 25%. IBM fell nearly 10 points from December '05 to late February
early March of 2006. These are just some examples from the Dow 30
Industrials. Just because it is a good or even great company doesn't
necessarily mean the stock will go up.
On the other hand, some cheaper stocks with perhaps lesser
fundamentals have provided fantastic returns for investors in the same
relative time frame. From January to March 27, 2006, Level 3
Communications (LVLT) enjoyed a 61.5% move from $2.75 to $4.44. Not
bad, +$1.69 on a $2.75 stock. QIAO Xing Univ Telephone (XING) moved up
67% from October 2005 to March 2006; a +$3.53 on a $5.25 stock. Cell
Genesys Inc. (CEGE) climbed $2.75 from a low in October 2005 to March
'06. That was a 58% gain. There are many other examples. Take a look
at the history of Finisar Corp (FNSR), a company with fairly high debt,
negative earnings, negative net income, negative ROE and negative ROA.
From August 2005 until March 2006 the stock more than quadrupled from
under $1 to almost $5.
The point is that often the lesser known and cheaper stocks can
provide very exciting returns. Traders and investors in these cheaper
issues are often "betting on the come." Often the companies with
cheaper stocks may have great management and great product; they may be
just getting up a head of steam. They need not be ignored by the
careful trader or investor.
Since fundamentals may be misleading on the lower priced stocks, I
believe they are best traded using technical analysis. I can use Ciena
(CIEN) as an example. There was a pretty clear entry on December 23,
2005 after the stock had bounced off the 50 day moving average on strong
volume. The high that day was $3.11. Had a trader bought at the high
that day ($3.11) and used a close below the 50 day moving average as an
exit, he would still be in the trade as of late March (the 27th) with
the stock trading around $5.25. So far, the move has shown a 68.8% gain
in three months (from December 23, 2005 to March 27, 2006 as I write
this article).
High potential percentage gains are one of the things I like about
trading lower priced stocks. Another thing I like is that the risk is
often small. If I buy a stock for $2.50, that is my maximum risk --
$2.50. Even if the stock dropped to 0 (and I did nothing while that was
happening) the most I could lose would be $2.50. Contrast that to
something like Cisco (CSCO) that dropped over $14 in a week at the
beginning of the bear market or to Google (GOOG) that sometimes has
dropped as much as $25 to even $35 in a day! Even under $30 stocks like
Intel (INTC) have dropped $2.00 overnight.
I search the $10 and under stocks with a couple of proprietary
formulae I have developed. I am always trying to find relatively low
risk plays with a potential reward to risk ratio of 2.5:1 or better. Of
course, cheaper stocks can be risky. Companies can disappear quickly,
but so can their pricier cousins (remember Worldcom, Enron, United
Airlines before the bankruptcy). All trading involves risk (so does
living life). Each of us needs to know our own risk tolerance, each of
us must educate ourselves to understand the risk in any position, each
of us must manage our own money and our own risk. That being said, I
have found that trading the $10 and under stocks can limit risk and
provide a potential for very significant returns.
Please consider a 30-day trial to my new $10 Trader Alert Service!
$10 Trader
Good Trading!
Bill Kraft
SUCCESS TRADING GROUP -- by the Success Trading Group Team
Our Success Trading service delivers quality trading ideas for the elite investor that has the financial wherewithal and market nimbleness to profit on small moves in a stock's price. Become a member and you will be provided with email and/or pager alerts intended to provide you with the opportunity to make many, many profitable trades.
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OPTION TRADER -- by Bill Kraft
Our Option Trading Service is for conservative traders that understand leverage pricinciples. We focus on powerful option trading strategies that place volatility and momentum in your favor. And we pride ourselves on minimizing our losses. We always know our downside potential in a trade.
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TREND TRADER -- by Bill Kraft
Trend trading as we try to practice it is a form of momentum trading. We prefer to try to capture profit out of the middle of the trend rather than try to catch reversal at bottoms and tops.
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$10 TRADER -- by Bill Kraft
We really enjoy trading stocks that are $10 and under. Often they provide the chance to enjoy high percentage gains and, of course, at worst, the risk is limited to what we paid for the stock.
Details Here.
COVERED CALL SERVICE -- by the Covered Call Team
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