Recent small-cap and biotech breakouts reflect increased risk appetite for more speculative plays, including single-digit stocks that have been routinely ignored by hedge funds and retail investors since the November 2016 election. Many of these issues have turned sharply higher, underpinned by a rotation out of the third quarter’s top performers, and these stocks could add to gains into year end.
This price zone naturally divides between two opposing market themes. First, it is overloaded with beaten-down stocks grinding through basing patterns after steep downtrends, hoping to regain favor with the investing public. Newer issues comprise a second and smaller group that is listing for the first time or advancing from the pink sheets due to growing revenues or bullish stories that attracts investor interest. (See also: Penny Stocks to Watch for October 2017.)
Traders should manage position size when trading low-priced equities because frequent secondary offerings can end nascent uptrends, stopping them dead in their tracks. In addition, it is important to watch out for sweetheart deals that offer hedge funds preferred shares while diluting common stock value. These common hazards also tell risk-conscious market players to maintain relatively tight stop-losses to limit their bearish impacts.
Adesto Technologies Corporation (IOTS) came public at $5.60 in October 2015 and hit an all-time high at $8.50 in December. It then entered a persistent downtrend, losing ground in a long series of lower highs and lower lows that found support in November 2016, posting an all-time low at $1.50. The stock ticked higher into January 2017 and took off in a strong uptrend that eased into a rising channel in February.
The stock rallied into the IPO opening print in May and dropped into a rounded consolidation pattern, ahead of an August breakout that has now reached the 2015 high (blue line). A breakout will open the door to the double digits, while the red-hot semiconductor sector offers a stiff tailwind for outsized gains. The Oct. 26 earnings report could offer a bullish catalyst for that rally wave. (For more, see: Adesto Technologies Shows Strength: Stock Gains 18%.)
Codexis, Inc. (CDXS) entered the national exchanges at $13 in April 2010 and fell into an immediate downtrend that continued into December 2013’s all-time low at $1.24. The subsequent recovery wave stalled at $5.65 in April 2015, giving way to a rounded correction that found support near $3 in March 2016. The stock returned to the 2015 high in July 2017, broke out into August and is now trading at a five-year high.
The rally has reached resistance at $6.88 (blue line), generated by the first swing low after the 2011 public offering. This level also marks the 50% retracement of the three-year downtrend, raising the odds for a pullback that tests the August breakout. As a result, a decline into $5.25 should offer a low-risk buying opportunity for long-term positions for those willing to hold the shares into a breakout and test of the IPO opening print in the double digits. (See also: Biotech’s Breakout to Start in the Fourth Quarter.)
Camtek Ltd. (CAMT) bounced to $7.87 in 2004 after selling off from $11.50 to 24 cents when the dotcom bubble burst in 2000. It tested that resistance level in 2006, 2011 and 2014, but it failed to break out while posting a higher low after each rally wave. The stock returned to resistance once again in June 2017 and sold off, finding support at the 200-day exponential moving average (EMA) in August. A bounce since that time has reached within three points of resistance.
The stock is building a short-term basing pattern with resistance near $6.00 and could still test the August low. A base breakout should favor a trip back to the June high, finally completing the multi-decade breakout pattern, ahead of an uptrend that reaches the 2000 high at $11.50. This setup may require patience, with a breakout delayed into the first quarter of 2018 while supporting a low-risk trade entry closer to $4.50. (For more, see: Strength Seen in Camtek: Stock Adds 5% in Session.)
The Bottom Line
Single-digit stocks are attracting aggressive capital these days, with many issues engaged in strong uptrends. Traders should look for this speculative fervor to continue into 2018, likely lifting these stocks to multi-year highs. (For additional reading, check out: Cheap Stocks Can Be Deceiving.)
<Disclosure: The author held no positions in the aforementioned securities at the time of publication.>