Possibly one of the most preferred methods for those using an active investing approach, selecting breakout stocks offers the promise of substantial returns. This approach involves identifying 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.
Determining Breakout Levels
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.
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 7681 stocks to only 7.
Here are the top five stocks that meet these criteria:
Mitek Systems, Inc. (MITK - Free Report) is a developer, marketer and seller of mobile image capture and identity verification software solutions. Mitek Systems’ average EPS surprise over the last four quarters is 51.4%.
Its expected earnings growth for the current year is 39.1%. FireEye has a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
CECO Environmental Corp. (CECE - Free Report) is a provider of critical solutions to the energy, environmental and filtration and fluid handling industries. CECO Environmental has a Zacks Rank #2 (Buy) and its expected earnings growth for the current year is 7.4%.
CAE Inc. (CAE - Free Report) is a designer, manufacturer and supplier of simulation equipment. CAE has a Zacks Rank #2 and its average EPS surprise over the last four quarters is 4.3%. Its expected earnings growth for the current year is 8.3%.
Frank's International N.V. (FI - Free Report) is a provider of engineered tubular services to the oil and gas industry. Frank's International has a Zacks Rank #2 and its expected earnings growth for the current year is 31.2%.
Horizon Technology Finance Corporation is engaged in mining, production and development of uranium and vanadium. Energy Fuels has a Zacks Rank #2 and its expected earnings growth for the current year is 11.7%.
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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.