Investors with an active approach often utilize a breakout investment strategy in their quest for appreciably high returns. This involves zeroing in on stocks trading within a tight band and buying them when they move out of it. In keeping with this approach, such stocks are sold whenever they move below this narrow band. If properly implemented, such a strategy has the ability to deliver impressive returns.
Spotting a Breakout Stock
The first step to selecting the right breakout stock is to calculate its support and resistance level. 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 zero in on those that are on the verge of a breakout or those that have just broken above the resistance level.
Checking Whether It’s for Real
Stocks that have breached their resistance levels should ideally be in high demand among traders. But the test of whether this is a genuine breakout is when 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 7882 stocks to only 17.
Here are the top five stocks that meet these criteria:
Cleveland-Cliffs Inc. (CLF - Free Report) , formerly known as Cliffs Natural Resources, is the largest producer of iron ore pellets in North America. Cleveland-Cliffs has a Zacks Rank #1 (Strong Buy) and its average EPS surprise over the last four quarters is 47.7%.
North American Construction Group Ltd. (NOA - Free Report) provides heavy construction and mining services primarily in Canada. North American Construction Group has a Zacks Rank #1 and its average EPS surprise over the last four quarters is 35.4%.
General Finance Corporation (GFN - Free Report) provides mobile storage, liquid containment and modular space solutions. General Finance’s average EPS surprise over the last four quarters is more than 100%. General Finance has a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
Vertex Energy, Inc. (VTNR - Free Report) operates as an environmental services company that recycles industrial waste streams and off-specification commercial chemical products. Vertex Energy has a Zacks Rank #2 (Buy) and its average EPS surprise over the last four quarters is 36.7%.
Photronics, Inc. (PLAB - Free Report) is a leading worldwide manufacturer of photomasks. Photronics has a Zacks Rank #2 and its average EPS surprise over the last four quarters is 52.7%.
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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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