A Reversal Looks Imminent with This High Risk / High Reward Stock

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: IQIYI Inc. (NASDAQ: IQ)

Today’s penny stock pick is the Chinese streaming video leader, IQIYI Inc. (NASDAQ: IQ).

iQIYI, Inc., together with its subsidiaries, provides online entertainment services under the iQIYI brand in the People’s Republic of China. The company offers various products and services comprising internet video, online games, live broadcasting, online literature, animations, e-commerce, and social media platform. It operates a platform that provides a collection of internet video content, including professionally-produced content licensed from professional content providers and self-produced content. The company also provides membership, content distribution, and online advertising services.

In addition, it operates iQIYI Mall, an e-commerce platform that focuses on entertainment-related merchandise, such as VR glasses, as well as sells electronics, apparel and accessories, and beauty and skincare products; iQIYI Show, a live broadcasting service that enables users to follow their favorite hosts, celebrities, and shows in real time through live broadcasting; and iQIYI Paopao, a social platform. Further, it is involved in the talent agency and IP licensing activities, as well as in developing Suike, a video community app.

Website:  www.iqiyi.com

Latest 10-k report: https://sec.report/Document/0001564590-21-011590/

Analyst Consensus: As per TipRanks Analytics, based on 5 wall street analysts offering 12-month price targets for IQ in the last 3 months, the stock has an average price target of $8.45, which is an 80% upside from current levels.

Source: TipRanks.com

Analyst Forecasts | Source: TipRanks.com

Potential Catalysts / Reasons for the Hype:

  • The positive comments made by Chinese government regulatory agencies regarding plans to boost the nation’s economy. China is planning to cut certain income tax rates, which is expected to reduce taxes by 110 billion yuan (roughly $17.27 billion) in the coming year.
  • The overall increase in viewership amid the pandemic.
  • IQ’s major shareholder is Baidu. The China-based tech giant owns a 52.2% stake in iQiyi. IQ can count on financial support from Baidu.
  • Hedge funds Increased Holdings by 313.3K Shares Last Quarter.

    Hedge Funds | Source: TipRanks.com

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

Bullish Indications

#1 Falling Wedge Pattern Breakout: The daily chart shows that the stock has been forming a falling wedge pattern for the past several months. These are marked as purple color lines. It has typically taken support at the bottom of the wedge before bouncing back. The stock has currently broken out from the falling wedge pattern. Once the stock breaks out of the falling wedge pattern, it could move higher.

IQ – Daily Chart

#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 Stoch: The %K line of the stochastic is above the %D line. This indicates a possible bullish setup.

#4 Bullish RSI: The RSI is currently moving higher from oversold levels, indicating bullishness.

#5 Broken Downtrend, Consolidation Area: The weekly chart shows that the stock has broken out of a downtrend and is currently consolidating. This is a possible bullish sign.

IQ – Weekly Chart

#6 Oversold RSI: The RSI is currently near oversold levels. This indicates that a reversal may be imminent soon.

#7 Bullish Stoch: The %K line of the stochastic is above the %D line and is moving higher from oversold levels. This indicates a possible bullish setup.

Recommended Trade (based on the charts)

Buy Levels: If you want to get in on this trade, the ideal buy level for IQ is above the price of around $5.30.

Target Prices: Our target prices are $7.00 and $8.00.

Stop Loss: To limit risk, place a stop loss below $4.40. Note that the stop loss is on a closing basis.

Our target potential upside is 32% to 51%.

For a risk of $0.90, our first target reward is $1.70, and the second target reward is $2.70. This is a nearly 1:2 and 1:3 risk-reward trade.

In other words, this trade offers 2x to 3x more potential upside than downside.

Potential Risks / Red Flags:

  1. The company has incurred net losses since its inception, including net losses in the amount of RMB9.1 billion, RMB10.3 billion, and RMB7.0 billion (US$1.1 billion) in 2018, 2019, and 2020, respectively.

    IQ – Net Loss

  2. The company has ongoing legal proceedings. Following the publication in April 2020 of a short seller report by Wolfpack Research, there has been a related SEC investigation and class action lawsuits.
  3. in April 2020, IQ and certain of its current and former officers and directors were named as defendants in putative securities class actions filed in federal court.
  4. As of December 31, 2020, 380 cases against IQ are pending before various courts in China.
  5. iQiyi’s latest quarterly update was underwhelming. In the third quarter, the company reported a net loss of $268.4 million, compared to the net loss of $188 million it reported during the year-ago period.
  6. The pandemic has significantly impacted IQ’s performance. The company’s movie launches currently come in at less than 50% of its 2019 levels. Meanwhile, television series is currently being released at only 33% of their pre-pandemic levels. IQ also faces tough regulatory challenges in China, affecting its ability to deliver content to its viewers. Consequently, iQiyi’s subscriber count as of the end of the third quarter was 103.6 million, down from the 104.8 million subscribers it had at the end of the third quarter of 2020.

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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