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 Fallen angels comprise the second category, with outdated products or well-positioned rivals triggering long-lasting declines into low-priced status.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)
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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)
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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)
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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.