Choosing breakout stocks is probably one of the most popular techniques used by active investors. The logic to this strategy for stock selection is to identify stocks that are trading within a narrow band. Such stocks are to be purchased as soon as they move above this channel and are sold when they fall below. In case a stock moves above this band, it usually gains momentum.
However, market watchers often caution against timing such a move incorrectly. This is because there is a significant risk of identifying stock movements as breakouts, even when this is not the case. At the same time, when utilized correctly, this strategy yields substantive gains, which is the reason for its enduring popularity.
Identifying Breakout Stocks
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, 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 that 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 genuine 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.
• 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 Zacks Rank #1 (Strong Buy) and Zacks Rank #2 (Buy) stocks can get through. You can see the complete list of today’s Zacks #1 Rank stocks here.
• 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 7,700 stocks to only 13.
Here are the top five stocks that meet these criteria:
Evolution Petroleum Corp. (EPM - Snapshot Report) is an exploration and production company that develops reserves through the application of conventional and specialized technology to domestic onshore oil and gas resources. It has a Zacks Rank #1 and its average EPS surprise over the last four quarters is 45.8%.
Windstream Holdings Inc. (WIN - Analyst Report) is one of the largest U.S. rural local exchange carriers (RLEC), primarily operating in rural communities in the southern and southwestern parts of the U.S. It has a Zacks Rank #2 and its average EPS surprise over the last four quarters is 138%.
Camtek Ltd. (CAMT - Snapshot Report) is a designer, developer, manufacturer, and marketer of automatic optical inspection systems and related products. Camtek has a Zacks Rank #2 and its average EPS surprise over the last four quarters is 35.4%.
Vonage Holdings Corporation (VG - Snapshot Report) offers communications services which connect individuals across the world using cloud based devices. It has a Zacks Rank #2 and its average EPS surprise over the last four quarters is 25.2%.
Lee Enterprises, Inc. (LEE - Snapshot Report) is a premier publisher of local news, information and advertising in primarily midsize markets. It has a Zacks Rank #2 and its average EPS surprise over the last four quarters is 50%.
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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.
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