Seeking out breakout stocks is probably one of the most favored techniques among active investors. The logic behind this kind of stock selection is to determine which stocks are trading within a narrow band. These stocks are to be bought as soon as they move above this channel and sold when they fall below. In case a stock moves above this band, it usually gains momentum.
At the same time, market watchers warn against incorrectly timing such a move. This is because there is a significant risk of identifying stock movements as breakouts even when this is not the case. However, when utilized judiciously, this strategy yields formidable gains, which is the reason why it remains popular.
Spotting Prospective Candidates
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 which have just breached this 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 7580 stocks to only 24.
Here are the top five stocks that meet these criteria:
First BanCorp. (FBP - Free Report) is a bank holding company for FirstBank Puerto Rico which offers a range of financial products and services. First BanCorp has a Zacks Rank #1 (Strong Buy) and its average EPS surprise over the last four quarters is 18.7%.
Clearfield, Inc. (CLFD - Free Report) designs and manufactures the FieldSmart fiber management platform, which includes its latest generation Fiber Distribution System and Fiber Scalability Center. Clearfield’s average EPS surprise over the last four quarters is 96.1%. Clearfield has a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
BioDelivery Sciences International, Inc. (BDSI - Free Report) is a specialty pharmaceutical company focused on the development and commercialization of treatments in the areas of pain management and drug addiction. BioDelivery Sciences has a Zacks Rank #2 (Buy) and its average EPS surprise over the last four quarters is 8.6%.
MGIC Investment Corporation (MTG - Free Report) through its subsidiaries is the leading provider of private mortgage insurance coverage in the United States to the home mortgage lending industry. MGIC Investment has a Zacks Rank #2 and its average EPS surprise over the last four quarters is 22.9%.
Kratos Defense & Security Solutions, Inc. (KTOS - Free Report) is a specialized National Security Technology business providing mission critical products, services and solutions. Kratos has a Zacks Rank #2 and its average EPS surprise over the last four quarters is 98.4%.
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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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