We recently started a series called “Penny Stock of the Day”. These ideas are geared towards 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: Gaotu Techedu Inc. (NYSE: GOTU)
Today’s penny stock pick is the technology-driven education company, Gaotu Techedu Inc. (NYSE: GOTU).
Gaotu Techedu Inc. provides online K-12 after-school tutoring services in the People’s Republic of China. Its K-12 after-school tutoring courses cover various K-12 academic subjects, including mathematics, English, Chinese, physics, chemistry, biology, history, geography, and political science.
The company also provides foreign language courses comprising English and Japanese, as well as English test preparation courses for students taking post-graduate entrance exams; and professional courses primarily for working adults preparing for professional qualification exams, such as teacher’s qualification, the Chartered Financial Analyst designation, securities qualification exams, and other exams.
In addition, it offers admission courses for admission tests, including national graduate entrance examination, civil service examinations, and others; and Gaotu App, an interactive learning app to various student groups. Further, the company provides other courses, including offline business consulting courses to enhance management skills for principals and other officers of private education institutions; and develops and sells smart devices, such as multi-function translation pen, as well as teaching and learning tools, which includes smart learning machine.
Website: https://ir.gaotu.cn
Latest 10-k report: https://files.genshuixue.com/1694213796_j8i8fw08.pdf
Analyst Consensus: Not Covered By Wall Street Analysts.
Potential Catalysts / Reasons for the Hype:
- Hedge Funds Increased Holdings by 1.2M Shares Last Quarter.
Hedge Funds | Source: TipRanks.com
- The company’s board of directors authorized an up to US$30 million share repurchase program.
- Reports that Mr. Larry Xiangdong Chen, the Company’s founder, Chairman, and CEO, intends to personally purchase up to US$20 million of the shares.
On analyzing the company’s stock charts, there seem to be multiple bullish indications…
Bullish Indications
#1 Downtrend Channel Breakout: The daily chart shows that the stock has broken out of a downtrend channel, which is shown as purple color lines. This is a possible bullish indication.
GOTU – Daily Chart
#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 Price above MAs: The stock is currently above its 50-day as well as 200-day SMA, indicating that the bulls have currently gained control.
#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 Bullish Aroon: The value of Aroon Up (orange line) is above 70 while Aroon Down (blue line) is below 30. This indicates bullishness.
#6 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. The stock is also trading above its 50-week SMA, indicating bullishness.
GOTU – Weekly Chart
#7 Bullish Stoch: The %K line is above the %D line of the stochastic in the weekly chart, indicating possible bullishness.
#8 MACD above Signal Line: In the weekly chart as well, 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 GOTU is above the price of $2.25.
Target Prices: Our first target is $4.00. If it closes above that level, the second target price is $6.00.
Stop Loss: To limit risk, place a stop loss at $1.20. Note that the stop loss is on a closing basis.
Our target potential upside is 78% to 167%.
For a risk of $1.05, our first target reward is $1.75, and the second target reward is $3.75. 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:
- The company has a history of net losses. GOTU reported a net loss of RMB3,103.5 million (US$487.0 million) in 2021, and a net loss of RMB1,392.9 million in 2020.
GOTU – Consolidated Statements of Operations
- The company was formerly known as GSX Techedu Inc. and changed its name to Gaotu Techedu Inc. in June 2021.
- In May 2020 and April 2021, Muddy Waters and Grizzly Report separately published short seller reports against the company. Consequently, the SEC asked the company to produce certain financial and operating records dating from January 1, 2017.
- In April 2020, a putative shareholder class action lawsuit was filed in the United States District Court for the District of New Jersey against the company, its chief executive officer and chief financial officer: Wu v. GAOTU Techedu Inc., et al, No. 2:20-cv-04457-ES-CLW (filed on April 17, 2020). On November 2, 2020, lead and named plaintiffs filed—purportedly on behalf of a class of persons who allegedly suffered damages as a result of their purchases or acquisitions of our ADSs between June 6, 2019, and October 20, 2020—an amended class action complaint, which alleges that the company’s public filings with the SEC contained material misstatements or omissions in violation of the federal securities laws.
- There are legal and operational risks and uncertainties associated with the company being based in or having its operations in China. GOTU is subject to complex and evolving PRC laws and regulations.
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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