Possibly the single most popular method utilized by active investors is to identify breakout stocks. This method seeks out stocks whose prices are varying within a tight range. In the event of a stock declining below the floor of this channel, it may be time to offload it from your portfolio. But if a stock manages to rise above this channel, it holds the possibility of delivering strong returns.
Identifying Breakout Levels
The key to this strategy is calculating the support and resistance levels of a stock. The floor of a stock’s trading channel is its support level and it should be sold as soon as it threatens to fall lower. On the other hand, the resistance is a stock's breakout level and it can gain substantially if it breaks the resistance level.
When a stock is close to its support level, demand is literally hitting the floor. On the other hand, demand rises when it is breaching its resistance level, signaling the right time to make a lucrative addition to your portfolio. The idea is to pick stocks which have just broken above their resistance barriers or are very closing to doing so
Has a Breakout Really 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.
• 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 7869 stocks to only 11.
Here are the top five stocks that meet these criteria:
Luxfer Holdings PLC (LXFR - Free Report) is a materials technology company specializing in the design, manufacture and supply of high-performance materials, components and gas cylinders. Luxfer Holdings’ average EPS surprise over the last four quarters is 4.6%. Luxfer Holdings has a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Callaway Golf Company (ELY - Free Report) is a designer, manufacturer and seller of golfing equipment. Callaway Golf has a Zacks Rank #2 (Buy) and its average EPS surprise over the last four quarters is 64.1%.
ACCO Brands Corporation (ACCO - Free Report) is a designer, manufacturer and marketer of branded office products. ACCO Brands has a Zacks Rank #2 and its average EPS surprise over the last four quarters is 11.1%.
Kosmos Energy Ltd. (KOS - Free Report) operates as an oil and gas exploration and production company focused on under-explored regions in Africa. Kosmos Energy has a Zacks Rank #2 and its average EPS surprise over the last four quarters is 19.9%.
Enable Midstream Partners, LP (ENBL - Free Report) owns, operates and develops natural gas and crude oil infrastructure assets serving major producing basins and markets. Enable Midstream Partners has a Zacks Rank #2 and its average EPS surprise over the last four quarters is 15.9%.
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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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