Small caps are underperforming blue chips so far in 2019, but buying interest in stocks under $5.00 continues at a healthy pace. Market players love these under-the-radar instruments, which fall into two broad categories. First, lowly start-ups graduate to national exchanges through initial public offerings (IPOs), with little more than a bullish story and business plan to attract shareholders. Fallen angels comprise the second category, with outdated products or well-positioned rivals triggering long-lasting declines into low-priced status.

Effective risk management is needed to trade both categories because earnings shortfalls, secondary offerings, and preferred shares for big investors can trigger 30% to 40% overnight sell-offs. Trailing stops, small-sized positions, and one-finger-on-the-exit-button at all times go a long way in building profits in these special situations, but once mastered, skill sets generate lifetime market edges that add strength to a broad variety of strategies.

Chart showing the share price performance of Conformis, Inc. (CFMS)

Conformis, Inc. (CFMS) researches, manufactures, and markets joint replacement implants. The company came public at $18.00 in July 2015 and posted an all-time high at $26.93 just one month later, The subsequent decline carved an endless series of lower highs and lower lows, finally bottoming out at an all-time low on the last trading day of 2018. It has been all upside since that time, with the stock now trading at a 22-month high just under $5.00.

The five-month uptrend has reached resistance at the February 2017 breakdown through the 2016 low at $4.80, predicting that the stock will pull back in the coming weeks to consolidate gains and shake out weak hands. The 50-day exponential moving average (EMA) now rising through $3.20 could offer a low-risk buying opportunity in this price structure, ahead of continued upside that eventually fills the February 2017 gap between $6.25 and $7.75.

Chart showing the share price performance of Orion Energy Systems, Inc. (OESX) 

Orion Energy Systems, Inc. (OESX) manufactures and sells lighting and energy management systems. The stock entered the national exchanges at $17.25 in December 2007 and hit an all-time high at $22.46 just three sessions later. The subsequent downturn entered the single digits during the 2008 economic collapse, finally bottoming out at $1.12 in December 2012. A bounce into 2014 stalled at $8.11, giving way to renewed selling pressure that broke the prior low in 2017.

The stock posted an all-time low at 53 cents in December 2018 and turned higher into January 2019, entering a recovery wave that has now reached a four-year high at $3.03. Healthy buying interest and a stair-step rally pattern predict even higher prices, with the next resistance level situated at the 2015 breakdown through support at $4.00. Meanwhile, the 2014 high above $8.00 offers an attractive long-term target for this strong bounce.

Chart showing the share price performance of Flexible Solutions International Inc. (FSI)

Canada's Flexible Solutions International Inc. (FSI) manufactures and markets specialty chemicals that slow the evaporation of water. A multi-year uptrend posted an all-time high at $5.35 in December 2003, ahead of an unrelenting decline that hit an all-time low at 52 cents nearly 11 years later. The stock bounced close to 2011 resistance above $3.00 in June 2015 and reversed once again, testing the deep low successfully in October.

The subsequent uptrend failed to pierce multi-year resistance during 2016 and 2017 rally impulses, while a 2019 uptick has finally mounted those levels, setting the stage for continued gains that could finally complete a round trip into the 2003 high. The stock looks overbought after 300% upside in five months, raising the odds for a pullback that could offer a low-risk buying opportunity closer to $3.00.

The Bottom Line

A handful of stocks trading under $5.00 are hitting new highs in the second quarter, offering high reward with equally high risk.

Disclosure and warning: The author held no positions in the aforementioned securities at the time of publication. Low-priced stocks are volatile and can generate catastrophic losses. Price levels in this article are hypothetical and do not represent buy recommendations or investment advice.