Trade This $5 Stock for a Target Potential Upside of 19%-46%

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: Stitch Fix, Inc. (NASDAQ: SFIX)

Today’s penny stock pick is the online personal styling service company, Stitch Fix, Inc. (NASDAQ: SFIX).

Stitch Fix, Inc. sells a range of apparel, shoes, and accessories for men, women, and kids through its website and mobile application in the United States and the United Kingdom. It offers denim, dresses, blouses, skirts, shoes, jewelry, and handbags under the Stitch Fix brand. It uses recommendation algorithms and data science to personalize clothing items based on size, budget, and style.


Latest 10-k report:

Analyst Consensus: As per TipRanks Analytics, based on 10 Wall Street analysts offering 12-month price targets for SFIX in the last 3 months, the stock has an average price target of $4.54.

Analysts | Source:

Potential Catalysts / Reasons for the Hype:

  • The company recently announced a better-than-expected Q3 earnings report, with Q3 GAAP EPS of -$0.19 (beat by $0.11) and revenue of $394.91M (beat by $6.09M).
  • Hedge Funds Increased Holdings by 1.3M Shares Last Quarter.

    Hedge Funds | Source:

  • The company announced that it will consider exiting the United Kingdom. Stitch Fix also revealed plans of closing its Dallas distribution center (next year) as well.

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

Bullish Indications

#1 Symmetrical Triangle Pattern Breakout: The daily chart shows that the stock has currently broken out a symmetrical triangle pattern, which is marked as purple color lines. A symmetrical triangle pattern represents a period of consolidation before the price breaks out. This is typically formed when there is indecision in the price movements and uncertainty among the buyers and sellers. Once a breakout from the upper trend line occurs, it usually signifies the start of a new bullish trend.

SFIX – 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 looks like a good area for the stock to move higher. The stock is also trading above its 50-week SMA, indicating that the bulls are gaining control.

SFIX – Weekly Chart

#7 Bullish Stoch: The %K line is above the %D line of the stochastic in the weekly, indicating possible bullishness.

#8 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 SFIX is above the price of $4.80.

Target Prices: Our first target is $5.70. If it closes above that level, the second target price is $7.00.

Stop Loss: To limit risk, place a stop loss at $4.20. Note that the stop loss is on a closing basis.

Our target potential upside is 19% to 46%.

For a risk of $0.60, our first target reward is $0.90, and the second target reward is $2.20. 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 a history of net losses. Net loss for the fiscal year ended July 30, 2022, was $207.1 million, and net loss for the fiscal year ended July 31, 2021, was $8.9 million.

    SFIX – Consolidated Statements of Operations and Comprehensive Loss

  2. The company was formerly known as rack habit inc. and changed its name to Stitch Fix, Inc. in October 2011.
  3. Despite being a loss-making company, the executives are being paid significant compensation.

    SFIX – Executive Compensation

  4. The company has multiple ongoing legal proceedings.
    1. On August 26, 2022, a class action lawsuit alleging violations of federal securities laws was filed by some stockholders in the U.S. District Court for the Northern District of California, naming the company, certain of its officers and directors, and certain of its affiliated stockholders as defendants. The lawsuit alleges violations of the Securities Exchange Act of 1934 for allegedly making materially false and misleading statements regarding SFIX’s Freestyle offering between December 2020 and December 2021.
    2. On October 11, 2018, October 26, 2018, November 16, 2018, and December 10, 2018, four putative class action lawsuits alleging violations of the federal securities laws were filed by certain stockholders in the U.S. District Court for the Northern District of California. The four lawsuits each make the same allegations.
  5. The retail apparel industry is highly competitive. SFIX competes with eCommerce companies that market the same or similar merchandise and services; local, national, and global department stores; specialty retailers; discount chains; independent retail stores; and the online offerings of traditional retail competitors. Additionally, the company also experiences competition for consumer discretionary spending from other product and experiential categories.
  6. Corporate Insiders Sold Shares Worth $111.5K in the Last 3 Months.

    Insiders | Source:

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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