|Symbol||Company||Jan 3rd Price|
|PKD||Parker Drilling Co.||$2.60|
|TGB||Taseko Mines Ltd.||$0.85|
|HOV||Hovnanian Enterprises Inc||$2.73|
|RTTR||Ritter Pharmaceuticals Inc||$2.71|
Penny stocks (stocks that trade at under $5.00) fall into two broad categories that reflect sharply different long-term outlooks. First, low-priced start-ups transition from over the counter markets onto the national exchanges through initial public offerings (IPOs), with torrid growth rates or bullish stories having the power to attract substantial speculative capital and strong uptrends. Sadly, IPO filing activity will end 2016 at the lowest level since 2009, with the 46% year over year decline making it harder than ever to find these future winners.
Beaten down companies comprise the second and larger category, with sharply lower prices forcing them to rely on bottom fishing to break long-term bearish trends. A basket of risk management tools is needed when trading these issues to avoid pitfalls that include secondary offerings and sweetheart deals with big investors. Tight stops, smaller positions, and aggressive exit strategies go a long way in building consistent profits while once mastered, required skill sets become lifetime market edges that support a broad variety of market strategies.
1. Parker Drilling Co (PKD)
Parker Drilling Co (PKD) topped out in the upper teens in the 1990s and posted lower highs in 2006 and 2014. A 2-year downtrend may have ended at 98-cents in January 2016, with subsequent price action carving a vertical buying wave that stalled at $3.16 in April after mounting the 200-day EMA. It pulled back into November, hitting an 8-month low at $1.85 and turned higher after the election, jumping back above the moving average.
The recent rally may have broken the blue trend line of lower highs and resistance at the 200-day EMA, setting the stage for an uptrend with a first upside target at the April 2015 swing high above $4.50. It’s been basing on top of new support for the last three weeks and could challenge the April high in January. The 200-day EMA marks the line-in-the-sand for this trade setup, favoring a logical stop loss under $2.25.
2. Taseko Mines Ltd (TGB)
Vancouver-based Taseko Mines Ltd (TGB) hit an all-time high at $14.25 just four months after coming public on the U.S. exchanges in 1994. The subsequent downtrend finally bottomed out at 11-cents in 2001, giving way to a multiyear uptrend that ended at $6.40 in 2008. A 2010 test at that level attracted aggressive selling pressure, generating a new downtrend that may have ended at a 12-year low in January 2016.
The subsequent recovery has unfolded in two rally waves that have lifted the stock into resistance at the 2015 swing highs just below round number resistance at $1.00. It tagged that milestone on December 7, pulled back and is testing it once again as 2016 draws to a close. A breakout should generate healthy momentum, supporting a continued uptick that faces a major barrier when it reaches the broken 2014 lows at $1.80 (red line).
3. Hovnanian Enterprises Inc (HOV)
Hovnanian Enterprises Inc (HOV) gained significant ground during last decade’s real estate bubble, lifting to an all-time high at $73.40 in 2005. The subsequent decline nearly bankrupted the homebuilder, coming to rest at 52-cents in March 2009. The stock has underperformed its peers by a wide margin for the last 7-years but could play catch-up under the Trump administration.
Higher lows in 2011 and 2016 have added to a low base that may yield a new uptrend. On Balance Volume (OBV) entered a distributive phase in 2013, posting lower highs into the first quarter of this year. It’s gained ground since that time, signaling accumulation by bottom pickers and value players. That buying pressure is finally translating into higher prices, with the momentum surge since early November doubling the stock’s price. The 50% retracement of the 2013 to 2016 decline at $4.32 offers a conservative upside target.
4. Intrepid Potash Inc (IPI)
Intrepid Potash Inc (IPI) came public in the upper-40s in April 2008 and posted an all-time high at $76.24 just two months later. It fell into the lower teens during the bear market and posted a lower high near $40 in 2011. The bottom dropped out of a channeled downtrend in 2015, dumping the stock to an all-time low at 65-cents in March 2016. It’s recovered in two buying waves since that time and is currently trading near a 10-month high.
The stock lifted above resistance at the 200-day EMA earlier this month and has held above that level for the first time since September 2014. Aggressive selling pressure returned early this week, just two weeks after the company hired Cantor Fitzgerald to explore strategic alternatives. Despite this burst of pessimism, the company could sell at a premium in coming months, rewarding new positions.
5. Ritter Pharmaceuticals Inc (RTTR)
Ritter Pharmaceuticals Inc (RTTR) came public at $5.00 in June 2015 and entered an immediate downtrend that posted an all-time low at 98-cents in February 2016. The subsequent uptick stalled below $1.90 in May, giving way to a broad pullback that posted a higher low at $1.20 in September. It turned sharply higher into October, reaching the 50% selloff retracement level at $3.25.
A pullback into November got bought, triggering a test of the high that’s still in progress as the calendar flips into January. OBV has carved a stairstep accumulation pattern, consistent with an uptrend that could eventually lift well above last year’s IPO. For now, market players can buy a breakout above $3.25, in anticipation of continued upside into the .786 Fibonacci retracement level at $4.52.
The Bottom Line
Four of the five featured stocks are beaten down value plays that require aggressive risk management and exit strategies to post profits. Ritter Pharmaceuticals offers the sole exception in a 2015 IPO that’s trying to build a loyal sponsorship base while it investigates compounds useful in the treatment of gastrointestinal diseases.
<Disclosure: the author held no positions in stocks mentioned above at the time of publication.>