Selecting breakout stocks is probably one of the most popular techniques that active investors utilize. The rationale behind this kind of stock selection is to find out which stocks are trading within a narrow band. These stocks are bought as soon as they move above this trading channel and are sold when they fall below. In case a stock moves above the upper bound, it usually gains momentum.
However, market watchers warn that incorrectly timing such a move could result in losses. This is because of the significant risk of identifying stock movements as breakouts, which in reality are not so. But one must keep in mind, that when used judiciously, the strategy yields lucrative gains, which is the reason for its enduring popularity.
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 that have just breached this level.
Determining Whether It's for Real
Stocks which have breached their resistance level should ideally be in high demand among traders. But the test of whether this is a genuine breakout is whether 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.
• Percentageprice 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 thanor 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 $15 (Stocks which are reasonably priced.)
These criteria narrow down the universe of over 7,700 stocks to only 12.
Here are the top 5 stocks that meet these criteria:
Primo Water CorporationPRMW operates as a provider of purified bottled water and water dispensers sold through major retailers across the U.S. and Canada. It has a Zacks Rank #1 (Strong Buy) and its average EPS surprise over the last four quarters is more than 100%.
AXT Inc.AXTI is a designer, developer, manufacturer and distributor of high-performance compound semiconductor substrates, as well as opto-electronic semiconductor devices. The company's average EPS surprise over the last four quarters is 75%. Currently, it sports a Zacks Rank #1. You can see the complete list of today's Zacks #1 Rank stocks here .
Cutera, Inc.CUTR is a designer, developer, manufacturer and marketer of products for use in laser and other light-based aesthetic applications. Cutera has a Zacks Rank #2 (Buy) and its average EPS surprise over the last four quarters is 76%.
Encana CorporationECA is a focused pure-play natural gas exploration and production (E&P) company. It has a Zacks Rank #2 and its average EPS surprise over the last four quarters is 71.2%.
Laredo Petroleum, Inc.LPI is engaged in the exploration, development and acquisition of oil and natural gas properties mainly in the Permian Basin located in West Texas. It has a Zacks Rank #2 and its average EPS surprise over the last four quarters is 9.6%.
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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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Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free reportPRIMO WATER CP (PRMW): Free Stock Analysis ReportAXT INC (AXTI): Free Stock Analysis ReportCUTERA INC (CUTR): Free Stock Analysis ReportENCANA CORP (ECA): Free Stock Analysis ReportLAREDO PETROLM (LPI): Free Stock Analysis ReportTo read this article on Zacks.com click here.