Active investors often utilize a breakout investment strategy in their search for strong returns. This involves zeroing in on stocks trading within a tight range and buying them when they step out of this band. In keeping with this approach, they are offloaded whenever they move below this narrow band. If properly implemented, such a strategy could deliver impressive returns.
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.
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 Zacks Rank #1 (Strong Buy) and #2 (Buy) stocks can get through. You can see the complete list of today’s Zacks #1 Rank stocks here.)
• 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 $15 (Stocks which are reasonably priced.)
These criteria narrow down the universe of over 7,700 stocks to only 23.
Here are the top five stocks that meet these criteria:
Commercial Vehicle Group, Inc. CVGI supplies interior systems, vision safety solutions and other cab-related products for the global commercial vehicle market. It has a Zacks Rank #1 and average EPS surprise over the last four quarters of 110.9%.
Foamix Pharmaceuticals Ltd. FOMX is a specialty pharmaceutical company which develops and commercializes foam-based formulations for acne, impetigo, and other skin conditions. It has a Zacks Rank #2 and its average EPS surprise over the last four quarters is 22.2%.
Kindred Biosciences Inc. KIN is a development-stage biopharmaceutical company focused on saving and improving the lives of pets. Kindred Biosciences has a Zacks Rank #2. Its average EPS surprise over the last four quarters is 12.2%.
Bovie Medical Corporation BVX is engaged in the manufacturing and marketing of a diverse line of medical devices and advanced coating technologies. It has a Zacks Rank #2 and its average EPS surprise over the last four quarters is 7.9%.
Extreme Networks, Inc. EXTR is a leading provider of a next generation of switching solutions that meet the increasing needs of enterprise local area networks internet service providers and content providers. It has a Zacks Rank #2 and its average EPS surprise over the last four quarters is 110.4%.
You can get the rest of the stocks meeting these criteria by signing up now for your 2-week free trial to the Research Wizard and start using this screen in your own trading. Further, you can also create your own strategies and backtest them first before taking the investment plunge.
The Research Wizard is a great place to begin. It's easy to use. Everything is in plain language. And it's very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.
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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