This High Risk / High Reward Stock Could Bounce From Here

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: DouYu International Holdings Ltd (NASDAQ: DOYU)

Today’s penny stock pick is the Chinese interactive games and entertainment live streaming services company, DouYu International Holdings Ltd (NASDAQ: DOYU).

DouYu International Holdings Ltd’s platform connects game developers and publishers, professional eSports teams or players and eSports tournament organizers, advertisers, and viewers. The company also sponsors eSports teams and organizes eSports tournaments. In addition, it streams other content to include a spectrum of live streaming entertainment options, such as talent shows, music, outdoor, and travel. Further, the company records and offers video clips to allow users to watch replays of selective live streaming content; and allows viewers and streamers to edit and upload short video clips by themselves.

Website:  www.douyu.com

Latest 10-k report:  https://sec.report/Document/0001193125-21-142788/

Analyst Consensus: As per TipRanks Analytics, based on 2 Wall Street analysts offering 12-month price targets for DOYU in the last 3 months, the stock has an average price target of $3.45, which is nearly 37% upside from current levels.

Potential Catalysts / Reasons for the Hype:

• The company announced that it would be going private. Tencent Holdings, which owns roughly 37% of DoYu’s stock, is planning to take the company private in a deal sometime this year, according to Reuters.
• It is rumored that the average takeover price would be around 50% to 60% over the previous closing price.
• Hedge Funds Increased Holdings by 83.4K 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 with high volume. Once the stock breaks out of the falling wedge pattern, it could move higher.

#2 Bullish ADX and DI: The ADX indicator shows bullishness as the +DI line is above the -DI line, and the ADX line is currently moving higher from below the +DI and -DI lines.

#3 Bullish Stoch:  The %K line of the stochastic is above the %D line, and has also moved higher from oversold levels, indicating possible bullishness.

#4 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.

#5 Above Support Area: The weekly chart shows that the stock is currently trading above a support area, which is marked as a pink color dotted line. This is a possible bullish indication.

#6 Bullish Stoch: The %K line is above the %D line of the stochastic in the weekly chart as well, and is also moving higher from oversold levels, indicating possible bullishness.

#7 MACD above Signal Line: In the weekly chart, the MACD (light blue color) is currently above the MACD signal line (orange color). 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 DOYU is above the price of $2.60.

Target Prices: Our first target is $3.80. If it closes above that level, the second target price is $6.00.

Stop Loss: To limit risk, place a stop loss below $1.90. Note that the stop loss is on a closing basis.

Our target potential upside is 46% to 131%.

For a risk of $0.70, our first target reward is $1.20, and the second target reward is $3.40. This is a nearly 1:2 and 1:5 risk-reward trade.

In other words, this trade offers 2x to 5x more potential upside than downside.

Potential Risks / Red Flags:

1. The company has incurred significant accumulated net losses to date. Although the company generated net incomes in 2020 it incurred net losses in the fourth quarter of 2020.
   

   DOYU – Consoldiated Statement of Comprehensive Income

2. The company has limited operating history and has a relatively new business model in a relatively new market, making it difficult to evaluate DOYU’s business and growth prospects.
3. The company executives are being paid significant compensation. As per the company’s latest annual report, for the fiscal year ended December 31, 2020, DOYU paid an aggregate of RMB29.0 million (US$4.4 million) in cash to its directors and executive officers, and an aggregate of RMB4.4 million (US$0.7 million) cash compensation to its non-executive directors.
4. The company has ongoing legal proceedings. In March and April 2020, the company and certain of its current and former officers and directors were named as defendants in several putative securities class actions filed in state and federal courts alleging that the company made material misstatements and omissions in its IPO registration statement. The cases allege claims under the Securities Act.
5. In December 2012, the SEC brought administrative proceedings against the PRC-based affiliates of the Big Four accounting firms, including the company’s independent registered public accounting firm, alleging that they had violated U.S. securities laws by failing to provide audit work papers and other documents related to certain other PRC-based companies under investigation by the SEC.

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.