This High Risk / High Reward Stock May Move Higher in the Short-Term

We recently started a series called “Penny Stock of the Day”. These ideas are geared for traders with an extremely high risk appetite.

Our Penny Stock of the Day is chosen by screening for stocks under $5 and then applying technical analysis on the shortlisted set of penny stocks showing unusual volume. When making these trades, please make sure to pay vigilant attention to pricing moves and have a strict stop loss in place to avoid significant losses.

Penny Stock of the Day: Gerdau S.A. (NYSE: GGB)

Today’s penny stock pick is the steel products and services company, Gerdau S.A. (NYSE: GGB).

Gerdau S.A. offers semi-finished products, including billets, blooms, and slabs; common long rolled products, such as rebars, wire rods, merchant bars, light shapes, and profiles to the construction and manufacturing industries; finished industrial products, including commercial rolled-steel bars, and light profiles and wires; agricultural products that include stakes and smooth wire products; and drawn products comprise barbed and barbless fence wires, galvanized wires, fences, concrete reinforcing wire meshes, nails, and clamps.

It also produces special steel products used in auto parts, light and heavy vehicles, and agricultural machinery, as well as oil and gas, wind energy, machinery and equipment, mining and rail, and other markets. In addition, the company offers flat products, including hot rolled coils and heavy plates; and resells flat steel products, as well as mines and produces iron ore.

The company operates through four segments: Brazil Business, North America Business, South America Business, and Special Steel Business.

Website:  www.gerdau.com

Latest 10-k report: https://sec.report/Document/0001104659-21-053189/

Analyst Consensus: Based on one Wall Street analyst offering 12-month price targets for GGB in the last 3 months, the stock has an average rating of ‘Moderate Buy’.

Potential Catalysts / Reasons for the Hype:

• The massive push to revitalize US infrastructure by the Biden administration, with nearly 20,000 miles of roads and 10,000 bridges shortlisted to be fixed. This requires steel, which bodes well for Gerdau.
• The company reported nearly double the income in 2020 compared to 2019. The company had also reported a standout Q2, where revenue increased by 119% on a year-over-year (YOY) basis in the quarter and gross profit surged by a whopping 654%.
  

  GGB – Net Income

• The upcoming Q3 results scheduled for late October.
• News that the company would resume steel production operations at the Araucária, Paraná unit due to the positive scenario for steel demand in Brazil, especially in the construction, infrastructure, and industry sectors.

On analyzing the company’s stock charts, there seem to be multiple bullish indications…

Bullish Indications

#1 Downtrend Channel, Ready For Breakout: The daily chart shows that the stock looks poised for a break out from a downtrend channel, which is shown as pink color lines. Once the stock breaks out of it and closes above the near-term resistance area, it could move higher.

#2 MACD above Signal Line: In the daily chart, the MACD (light blue color) is currently above the MACD signal line (orange color). This indicates a possible bullish setup.

#3 Bullish RSI: The RSI is currently moving higher after reaching oversold levels and is nearing 50. This is a possible bullish sign.

#4 Flag Pattern: The weekly chart shows that the stock was in a strong uptrend after which it started consolidating and was in a narrow range. This is a classic flag pattern, which is a continuation pattern. The flag pattern is marked in purple color in the chart. Whenever a stock breaks out of the flag pattern, it typically continues its previous trend which is an uptrend in this case.

#5 Bullish CCI: The CCI is currently moving up from oversold levels. This indicates that the price may move higher in the near term.

Recommended Trade (based on the charts)

Buy Levels: If you want to get in on this trade, the ideal buy level for GGB is above the price of $5.45.

Target Prices: Our first target is $6.50. If it closes above that level, the second target price is $8.00.

Stop Loss: To limit risk, place a stop loss at $4.75. Note that the stop loss is on a closing basis.

Our target potential upside is 19% to 47%.

For a risk of $0.70, our first target reward is $1.05, and the second target reward is $2.55. This is a nearly 1:2 and 1:4 risk-reward trade.

In other words, this trade offers 2x to 4x more potential upside than downside.

Potential Risks / Red Flags:

1. The company has significant share dilution.
2. China’s recent power rationing and government demands for energy consumption cuts could weigh on the profitability of steel companies.
3. There is a conflict of interest, as there are multiple family members present in the company management. Jorge Gerdau Johannpeter, Germano Hugo Gerdau Johannpeter, Klaus Gerdau Johannpeter and Frederico Carlos Gerdau Johannpeter are brothers. André Bier Gerdau Johannpeter is Jorge Gerdau Johannpeter’s son, Claudio Johannpeter is Klaus Gerdau Johannpeter’s son, and Guilherme Chagas Gerdau Johannpeter and Richard Chagas Gerdau Johannpeter are sons of Frederico Carlos Gerdau Johannpeter. Guilherme Chagas Gerdau Johannpeter and Richard Chagas Gerdau Johannpeter are brothers.
4. The company has significant debt.
   

   GGB – Debt

5. The expense recognized related to key management salaries, variable compensation and benefits were R$ 41,165 during 2020, compared to R$ 32,359 in 2019.
6. Exchange rates could significantly impact the company’s revenue. One of the reasons for the boost to the company’s North America revenue compared to a year ago was due to the appreciation of the dollar against the Brazilian real.
7. The company is heavily tied to the political stability of the Brazilian government.

As you can see, today’s featured penny stock offers big upside potential… but it also comes with a number of risks and red flags. As always, when dealing with penny stocks, we advise caution before entering into such high-risk ventures. Remember to think before you trade… understand the risks… and if you decide to trade, stick to your stop-losses!

Happy Trading!

— Trades of the Day Research Team

READ BEFORE TRADING PENNY STOCKS: The allure of penny stocks lies in their potential to deliver massive gains in a short period of time. However, in exchange for that opportunity, most penny stocks carry tremendous risk. They can be extremely volatile and are susceptible to “pump and dump” schemes and fraud.

Unlike regular stocks, the financial condition of most penny stock companies can be extremely difficult to analyze, as the majority of such stocks are traded on over-the-counter (OTC) exchanges, which are typically less transparent and less regulated than the major exchanges. In fact, in the penny stock space, it’s often easier to spot warning signs and red flags than it is to identify a sound investment. Nevertheless, we do our best to identify short-term trade opportunities in this exciting space because we know some of our readers are looking for high-risk, high-reward ideas. We just urge you to make sure you fully understand the risks before making any of these trades.

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