Favored yet divisive, picking breakout stocks remains a popular strategy among active investors. The idea is fairly simple -- to identify stocks trading within a narrow band and buy them when they move above this channel or sell when they move below. If a stock trends above the channel, it promises substantial gains for investors.
But critics warn of the risk of timing such a move or identifying a wrong breakout level. However, when executed correctly, this strategy can yield lucrative gains, which explains its enduring popularity.
Spotting Breakout Stocks
The first step to selecting the right breakout stocks is to calculate their support and resistance levels. A support level is the lower bound for stock movements while a resistance level refers to the maximum price which it trades within over a considerable period.
In other words, the demand for a stock is at its lowest at its support level, which means most traders are willing to sell it. At the resistance level, most traders are willing to go long on the stock, which means that they would like to add them to their portfolios. The key to identifying breakout stocks is to pin down those that are on the verge of a breakout or those that have just broken above the resistance level.
Determining Whether It’s for Real
Stocks which have breached their resistance level should ideally be in high demand among traders. But the test of whether this is a genuine breakout is whether they go on to attain higher prices and the old barrier becomes a new support. This is why it is important to determine whether a long-term price trend is about to emerge.
Only a study of long-term trends can determine whether the existing trading channel has been breached effectively. This indicates the strength of the support or resistance levels. If you can identify the effective channel for a stock, picking it even at a not-so-reasonable price would give you significant returns.
• 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 $20 (Stocks which are reasonably priced.)
These criteria narrow down the universe of over 7862 stocks to only 8.
Here are the top five stocks that meet these criteria:
Drive Shack Inc. is the owner and operator of golf-related leisure and entertainment businesses. Its average EPS surprise over the last four quarters is more than 100%. Drive Shack carries a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Cerus Corporation (CERS - Free Report) is developing medical products based on a platform technology that prevents nucleic acid replication. Cerus has a Zacks Rank #2 (Buy) and its average EPS surprise over the last four quarters is 7.8%.
ReWalk Robotics Ltd. develops, manufactures and markets wearable robotic exoskeletons for individuals with spinal cord injury. ReWalk Robotics has a Zacks Rank #2 and its average EPS surprise over the last four quarters is 14.9%.
Aerohive Networks, Inc. (HIVE - Free Report) designs and develops a cloud-managed mobile networking platform that enables enterprises to deploy a mobile-centric network edge. Aerohive Networks has a Zacks Rank #2 and its average EPS surprise over the last four quarters is 75.7%.
Cloud Peak Energy Inc. (CLD - Free Report) operates as a producer of low sulfur, high quality, sub-bituminous coal in the United States. Cloud Peak Energy has a Zacks Rank #2 and its average EPS surprise over the last four quarters is more than 100%.
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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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