This $3 Stock Just Broke Out on High Volume

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: BRF S.A. (NYSE: BRFS)

Today’s penny stock pick is the Brazilian food processing company, BRF S.A. (NYSE: BRFS).

BRF S.A. engages in raising, producing, and slaughtering poultry and pork for processing, production, and sale of fresh meat, processed products, pasta, margarine, pet food, and other products.

The company’s product portfolio comprises meat products, including frozen whole and cut chicken, frozen pork, and turkey; processed food products, such as marinated, frozen, whole, and cut chicken, roosters, sausages, ham products, bologna, frankfurters, salamis, bacon, cold meats, other smoked products; and frozen processed meats comprising hamburgers, steaks, breaded meat products, kibbeh, and meatballs, as well as chicken sausages, chicken hot dogs, and chicken bologna. It also produces and sells frozen prepared meals, such as lasagna, macaroni and cheese, pies, ready-to-eat meals, pizzas, and other frozen foods; plant-based products, such as nuggets, pies, vegetables, and burgers; frozen desserts and cheese bread; spreads, that include margarine, butter, cream cheese, and pate, as well as animal feed and hatcheries.

The company primarily sells its products under the Sadia, Perdigão, Qualy, Chester, Kidelli, Perdix, Biofresh, Gran Plus, and Banvit brands. It serves supermarkets, wholesalers, retail stores, food services, restaurants, and other institutional buyers.

The company is also involved in the provision of consultancy, marketing, and logistics services; generation and commercialization of electric energy; and import, industrialization, and commercialization of products. BRF S.A. operates primarily in Brazil, the Americas, Eurasia, Europe, Malaysia, the Middle East, Africa, Asia, and internationally. The company was formerly known as BRF-Brasil Foods S.A. and changed its name to BRF S.A. in April 2013.

Website:  https://www.brf-global.com

Latest 10-k report:  https://api.mziq.com/mzfilemanager/v2/d/4d44a134-36cc-4fea-b520-393c4aceabb2/5ea024f2-2465-1c83-8bc3-146a0cfe3604?origin=1

Analyst Consensus: As per TipRanks Analytics, based on 1 Wall Street analyst offering 12-month price targets for BRFS in the last 3 months, the stock has an average rating of “Hold”.

Potential Catalysts / Reasons for the Hype:

• The overall bullishness on the company’s sales prospects ahead of the holiday season. Marcel Sacco, vice president of marketing, projected a 5% to 6% growth in Christmas sales revenue from a year ago, citing improvements in the local economy and a broad range of product offerings.
• Supply restrictions in competing countries, declining production in China, and lower grain costs are poised to benefit Brazil’s chicken and pork exports in the second half of 2023 in terms of volume and profitability.

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

Bullish Indications

#1 Breakout From Consolidation Area: The daily chart shows that the stock was consolidating within a price range for the past few days. This area is marked as a purple color rectangle. The stock has now broken out from this consolidation area with high volume and is currently trading above it. The breakout level of this consolidation area typically acts as a good support level.

#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 SMA as well as 200-day, 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 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.

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

Recommended Trade (based on the charts)

Buy Levels: If you want to get in on this trade, the ideal buy level for BFRS 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 $5.00.

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

Our target potential upside is 46% to 92%.

For a risk of $0.70, our first target reward is $1.20, and the second target reward is $2.40. 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 a history of net losses. BRFS’s net loss was R$3,141,626 thousand in 2022.
   

   BRFS – Results of Operations

2. BRFS is engaged in multiple ongoing legal proceedings with Brazilian tax authorities. This includes ICMS, federal PIS and COFINS, and lawsuits related to the payment of social security contributions under various Brazilian government programs (CPRB, INCRA, FUNRURAL, SESI/SENAI/SEBRAE).
3. As of December 31, 2022, the company is involved in 11,363 labor claims ongoing in the total amount of approximately R$946,655 thousand. These cases are mainly related to overtime, work in hazardous conditions, rest breaks, set forth in article 253 of the Labor Code (Consolidation of Labor Laws), illnesses allegedly contracted at work, and work accidents.
4. As of December 31, 2022, the company is the defendant in 4,057 civil, commercial, and other proceedings (administrative, environment, regulatory, and other matters) amounting to total claims of R$3.62 billion.
5. The company has significant debt.
   

   BRFS – Debt

6. In 2022, the total salary and compensation paid by BRFS to all its executive officers and members of board of directors and fiscal council for their services was R$35.5 million. The aggregate total compensation paid to members of the board of directors, fiscal council and audit and integrity committee, and executive officers in 2022 was R$36.8 million.

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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