For active investors, seeking breakout stocks is often a preferred investment strategy. In order to do so, they must zero in on stocks trading within a fairly tight range and purchase them when they move out of this band and offload them whenever they fall below the band. If correctly implemented, such a strategy could deliver impressive returns.
Identifying 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 zero in on those that are on the verge of a breakout or those that have just broken above the resistance 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 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.
Screening Parameters
• 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 $15 (Stocks which are reasonably priced.)
These criteria narrow down the universe of over 7,700 stocks to only 16.
Here are the top 5 stocks that meet these criteria:
B&G Foods Inc. BGS and its subsidiaries manufacture, sell and distribute a diversified portfolio of high-quality, shelf-stable and frozen foods across the U.S., Canada and Puerto Rico. It has a Zacks Rank #1 (Strong Buy) and its average EPS surprise over the last four quarters is 5.7%.
The J. M. Smucker Company SJM is a leading marketer and manufacturer of consumer food and beverage products and pet food and pet snacks in North America. It has a Zacks Rank #1 and its average EPS surprise over the last four quarters is 19.9%.
Central Garden & Pet Company CENT is a leading producer and marketer of premium and value-oriented products focused on the lawn & garden and pet supplies markets in the U.S. It has a Zacks Rank #1 (Strong Buy) and its average EPS surprise over the last four quarters is 66.3%.
Dave & Buster's Entertainment, Inc. PLAY is an owner and operator of venues in North America that combine dining and entertainment. It has a Zacks Rank #1 (Strong Buy) and its average EPS surprise over the last four quarters is more than 100%.
Mesa Laboratories Inc. MLAB designs, develops, acquires, manufactures and markets instruments and systems utilized in connection with industrial applications and hemodialysis therapy. It has a Zacks Rank #1 (Strong Buy) and its average EPS surprise over the last four quarters is 46.2%.
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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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