Schaeffer's 43rd Anniversary Stock Picks in 2024

2 Cheap Small-Cap Stocks With Room to Run

Small-cap stocks offer traders a low-cost opportunity to expand their portfolios

Feb 16, 2017 at 11:35 AM
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Small-cap stocks have been gaining ground in 2017. Though large-cap stocks have displayed more leadership, the Russell 2000 Index (RUT) is up 3.2% year-to-date, and recently took out its December 2016 record high, a level Schaeffer's Senior V.P. of Research Todd Salamone has been keeping a close eye on. Despite this relative underperformance, small-cap stocks can offer traders a low-cost way to expand their portfolio, considering these companies have a market cap ranging between $300 million and $2 billion, compared to the massive market caps of blue-chip firms. Two small-cap stocks that could have the potential for near-term upside are biotech Arena Pharmaceuticals, Inc. (NASDAQ:ARNA) and Apple Inc. (NASDAQ:AAPL) supplier AU Optronics Corp (ADR) (NYSE:AUO) -- with the shares of each stock trading south of $4.

Key Technical Levels Could Help Buoy Arena Pharmaceuticals

ARNA is up nearly 13% from its Jan. 20 annual low at $1.34 -- a level that has served as a base for the shares over the last year -- to trade at $1.52. The stock has more recently pulled back from the three-month high it hit in early February to linger near $1.50, which coincides with a 50% Fibonacci retracement of this recent rally. What's more, the shares of ARNA have recently overtaken their 50-day moving average, a move that has historically been a strong buy signal over the past year, according to Schaeffer's Senior Quantitative Analyst Rocky White. There's ample sideline cash available to help fuel a short-term pop for Arena Pharmaceuticals, Inc. shares, too, considering the stock's short interest ratio is docked at a lofty 4.4. In other words, it would take more than four sessions for short sellers to cover their bearish bets, at ARNA's average pace of trading.

ARNA daily chart

Short Sellers May Unlock More Gains for AU Optronics Stock

AUO has surged nearly 52% over the past nine months, with the shares last seen trading at $3.78. More recently, the stock pulled back after topping out near $4.30 in early February, but found a floor -- and springboard -- in the $3.60-$3.70 region, home to AUO's rising 180-day moving average and a 50% Fibonacci retracement of its mid-2016 surge. What's more, this coincided with a breach of its lower Bollinger Band, typically a strong buy signal for stocks. Should AU Optronics Corp continue its longer-term uptrend, a continued round of short-covering could translate into fresh tailwinds. Though short interest fell 8.4% in the most recent reporting period, it would still take more than two weeks to cover the remaining bearish bets -- at the stock's typical trading volume.

daily auo chart

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