Single-digit stocks have come alive in early 2019, underpinned by a Russell 2000 Index rally that has now carried nearly 25%. Even so, it takes special risk management skills to make money on these volatile issues because most are shaking off long-term downtrends, with weak or little profit growth. As a result, it is best to stick with the strongest plays, especially those hitting two- and three-year highs.
It's easy to locate these potential winners with a market scan that computes current positioning relative to the 200-day exponential moving average (EMA). Stocks that trade highest on this sorted list are outperforming their peers by a wide margin, making it easier to add to gains. Conversely, it's best to pass on issues that have undergone more than a single reverse split in their public history because those offerings severely dilute ownership.
Nevada-based 3Pea International, Inc. (TPNL), formerly known as Paypad, offers prepaid transaction processing and cardholder enrollment services. It came public in the over-the-counter (OTC) market, a.k.a. pink sheets, at nine cents in 2008, while liquidity surged in July 2018 after the stock lifted off a small basing pattern above $2.50. It has more than tripled in price in the past six months, reaching an all-time high at $8.00 last week.
A rally above that level could develop rapid upside, lifting this small-cap leader into round number resistance at $10.00. On the flip side, a reversal and downturn should hold above the midpoint of the Feb. 7 wide range rally bar, with a decline just below $6.00 offering a potential pullback buying opportunity. Average volume has now exceeded 400,000 shares per day, but the stock continues to trade with a relatively wide spread, so it makes sense to use limit orders for trade execution.
Zix Corporation (ZIXI) provides e-mail encryption and device security services for the health care industry from its Dallas headquarters. The stock fell to an all-time low at 51 cents in 2006 and turned higher, topping out at $6.24 in December 2007. It posted a higher low at 88 cents following the 2008 economic collapse and stair-stepped higher in a shallow pattern that finally completed an 11-year round trip into the prior high in May 2017.
A pullback into February 2018 printed the seventh higher low of the decade, ahead of a February 2019 breakout that has now reached a 14-year high at $8.60. The stock has gone straight up since the Jan. 15 low at $5.34, posting an unsustainable 61% rally, predicting that it will soon turn lower to shake out weak hands. A pullback that settles near new support at $6.50 could offer a low-risk buying opportunity, ahead of a secondary rally impulse that reaches the double digits.
Israel's Camtek Ltd. (CAMT) designs and sells measuring equipment for the semiconductor industry. The company came public near $6.00 in August 2000 and posted an all-time high at $11.50 just one month later, ahead of a steep decline that ended at 31 cents in 2003. Higher lows in 2009 and 2013 preceded upticks that stalled well under the prior high, while a 2016 higher low generated a bounce that reached within 39 cent of resistance in August 2018.
The stock nearly got cut in half into December, finding support at $6.29, ahead of a recovery wave that is now trading about two points under the 2018 high. Accumulation has risen back to 2018 levels, raising the odds for a final buying surge that reaches resistance ahead of a multi-decade breakout into the upper teens. However, patience is needed with this play because it has just crossed the 200-day EMA for the sixth time in four months, predicting continued basing action around the $7.50 level before directional momentum takes hold.
The Bottom Line
Single-digit stocks are exhibiting unusual first quarter strength, predicting continued upside as long as the market-leading Russell 2000 small-cap index keeps adding points.
Disclosure: The author held no positions in the aforementioned securities at the time of publication.