Probably one of the most favored methods for those utilizing an active investing approach, picking breakout stocks offers the promise of substantial returns. This method involved zeroing on those stocks whose prices are varying within a narrow band. If the price of the stock falls below this channel, it could be the best time to sell of this stock. However, the best time to buy a stock as per this strategy is when it is about to break above this trading band. Such stocks offer the prospect of impressive gains.

Spotting Prospective Candidates

In order to identify breakout stocks, you must first determine their resistance and support levels. A resistance level is the barrier which must be broken so as to be identified as a breakout stock. Meanwhile, a support level is the floor for the stock’s movement.

At the breakout level, the demand for the stock has peaked, making it a natural choice for traders. On the other hand, when a stock hits the support floor, traders are eager to offload it. In order to spot breakout stocks, you would have to see which of these are on the brink of breaking the resistance barrier or those which have just breached this level.

Has a Genuine Breakout Occurred?

The primary risk associated with such a strategy is that the decision to buy an apparent breakout candidate has been incorrectly timed. When a stock moves above the resistance level, it should be a highly prized commodity for traders. However, whether such a breakout is at all genuine is another matter altogether.

For a bona fide breakout, the stock’s earlier resistance barrier should become its new support level. This only happens if the trading channel that has been established is tested by observing long-term price trends. The strength of the support and resistance levels can be ascertained only through such a study. Despite the risk of misidentification, correctly identifying such stocks can yield considerable returns, even at a price which may not seem attractive at first glance.

Screening Parameters

• Percentage price change over four weeks between 10% and 20% (Stocks which are showing considerable price increases, but whose gains are not excessive.)

• Current Price /52-Week High greater than or equal to 0.9 (Stocks which are trading 90% close to their 52-week highs.)

• Zacks Rank less than or equal to #2
(Only Strong Buy and Buy rated stocks can get through.)

• Beta for 60 months less than or equal to 2
(Stocks which move by a greater degree than the broader market but within a reasonable limit.)

• Current price less than or equal to $15 (Stocks which are reasonably priced.)

These criteria narrow down the universe of over 7,000 stocks to only 13.

Here are the top 5 stocks that meet these criteria:

AXT Inc. (AXTI Quick QuoteAXTI - Free Report) is a designer, developer, manufacturer and distributor of single and compound element semiconductor substrates. It has a Zacks Rank #1 (Strong Buy) and its average EPS surprise over the last four quarters is 75%.

Viavi Solutions Inc. (VIAV Quick QuoteVIAV - Free Report) provides software and hardware platforms and instruments for telecommunications service providers, wireless operators, cable operators, network-equipment manufacturers and enterprises. It has a Zacks Rank #2 (Buy) and its average EPS surprise over the last four quarters is 68.8%.

RealNetworks Inc. is a leading provider of branded software products and services that enable the creation and real-time delivery and playback of audio, video, text, animation and other media content over the Internet and intranets on both a live and on-demand basis It has a Zacks Rank #2 and its average EPS surprise over the last four quarters is 29.4%.

Exar Corp. designs, develops and markets analog and mixed-signal integrated circuits for use in communications and video and imaging products. It has a Zacks Rank #1 and its average EPS surprise over the last four quarters is 137.5%.

Vishay Intertechnology Inc. (VSH Quick QuoteVSH - Free Report) is a leading international manufacturer and supplier of discrete passive electronic components and discrete active electronic components, particularly resistors, capacitors, inductors, diodes and transistors. It has a Zacks Rank #1 and its average EPS surprise over the last four quarters is 19.3%.

While backtesting over a two-year timeframe (Aug 15, 2014 to Aug 19, 2016), considering a four-week holding period, a portfolio following this strategy provided a total return of 17.4% compared with the S&P 500’s return of 8.6%.For investors with a reasonably high-risk appetite, this strategy provides rich rewards.

You can get the rest of the stocks meeting these criteria by signing up now for your 2-week free trial to the Research Wizard and start using this screen in your own trading. Further, you can also create your own strategies and backtest them first before taking the investment plunge.

The Research Wizard is a great place to begin. It's easy to use. Everything is in plain language. And it's very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.

Click here to sign up for a free trial to the Research Wizard today.

Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.

Disclosure: Performance information for Zacks’ portfolios and strategies are available at: https://www.zacks.com/performance.

Confidential from Zacks
Beyond this Analyst Blog, would you like to see Zacks' best recommendations that are not available to the public? Our Executive VP, Steve Reitmeister, knows when key trades are about to be triggered and which of our experts has the hottest hand. Click to see them now>>