Picking breakout stocks is one of the most favored methods for those utilizing an active investing approach since this strategy promises superlative returns. [Using specific screening parameters Zacks identified 9 prospective candidates out of an universe of 7875 and this article highlights the top 5 stocks that meet their criteria.]
The original article has been edited here for length (…) and clarity ([ ]).
This method involves zeroing in on those 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 off this stock.
- If the price of the stock is about to break above this trading band then the stock offers the prospect of impressive gains.
Identifying Prospective Candidates
In order to identify breakout stocks, you must first determine their resistance and support levels.
- A resistance level is a barrier which must be broken so as to be identified as a breakout stock.
- A support level is the floor for the stock’s movement.
At the breakout level, the 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.
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.)
Here are the top 5 stocks that meet the above criteria: Each of these has a Zacks Rank #1 (Strong Buy).
- Johnson Outdoors Inc. (JOUT) is a designer, marketer, and manufacturer of watercraft, marine electronics, diving and outdoor equipment. Johnson Outdoors’ average EPS surprise for the last four quarters is more than 100%.
- Weight Watchers International, Inc. (WTW) is the largest provider of weight control programs in the world. Weight Watchers’ average EPS surprise for the last four quarters is more than 100%.
- FMC Corp. (FMC) is a diversified chemical company that serves agricultural, industrial, environmental and consumer markets across the globe. FMC Corp’s average EPS surprise for the last four quarters is 8.2%.
- Momo Inc. (MOMO) is the operator of a mobile-based social networking platform primarily in the Peoples Republic of China. Momo Inc.’s average EPS surprise for the last four quarters is 17.2%.
- SolarEdge Technologies, Inc. (SEDG) is a designer, seller and developer of direct current optimized inverter systems for solar photovoltaic installations. SolarEdge’s average EPS surprise for the last four quarters is 29.1%.
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