Selecting breakout stocks continues to be one of the most popular methods utilized by active investors. This technique seeks to identify those stocks whose prices are varying within a specific band. In case a stock falls below the lower bound of this band, it may be time to offload it from your portfolio. However, a stock breaking above this channel carries the promise of delivering strong gains…
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 that 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.
Verifying Whether It’s for Real
Stocks that 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 the stocks go on to attain higher prices and the old barrier becomes the 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.)
No matter whether the market is good or bad, stocks with a Zacks Rank #1 (Strong Buy) or 2 (Buy) have a proven history of outperformance. 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 that 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 more than 7,688 stocks to only 17.
Here are five of the 16 stocks that passed the screen:
Build-A-Bear Workshop, Inc. BBW is a multi-channel retailer of plush animals and related products. It carries a Zacks Rank #1. The company’s expected earnings growth rate for the current year is more than 100%.
Lifetime Brands, Inc. LCUT is the designer, marketer and distributor of kitchenware, cutlery & cutting boards, bakeware & cookware, pantryware & spices, tabletop and bath accessories. The company carries a Zacks Rank #1 and has an expected earnings growth rate of 46.3% for the current year.
SWK Holdings Corporation SWKH is a specialty finance company that is focused on the healthcare sector. It carries a Zacks Rank #1 and has an expected earnings growth rate of 46% for the current year.
Vector Group Ltd. VGR is a manufacturer and seller of…
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