An active investing approach involves picking breakout stocks, or in other words, searching for stocks whose prices are fluctuating within a specific band. It’s wise to offload the stock if it falls below the lower bound of this band. Similarly, once the stock breaks above this channel, it can deliver strong gains.
To that end, First Watch Restaurant Group FWRG, NeoGenomics NEO and Universal Stainless & Alloy Products USAP have been selected as the breakout stocks for today.
Zeroing in on Breakout Stocks
To select the right breakout stock, one has first to calculate its support and resistance level. A support level is the lower bound for stock movements, while a resistance level refers to the maximum price it trades within 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. Most traders are willing to go long on the stock at the resistance level, meaning they would like to add them to their portfolio. The key to identifying breakout stocks is to zero in on those on the verge of a breakout or those that have just broken above the resistance level.
Has a Genuine Breakout Occurred?
The primary risk associated with such a strategy is that the decision to buy an apparent breakout candidate has been incorrectly timed. When a stock moves above the resistance level, it should be a highly prized commodity for traders. However, whether such a breakout is genuine is another matter altogether.
For a bona fide breakout, the stock’s earlier resistance barrier should become its new support level. This only happens if the trading channel that has been established is tested by observing long-term price trends. The strength of the support and resistance levels can be ascertained only through such a study. Despite the risk of misidentification, correctly identifying such stocks can yield considerable returns, even at a price that may not seem attractive at first glance.
• Percentage price change over four weeks between 10% and 20% (Stocks showing considerable price increases but whose gains are not excessive.)
• Current Price /52-Week High greater than or equal to 0.9 (Stocks 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 reasonably priced.)
These criteria narrow down the universe of more than 6,853 stocks to only eight. Here’re the top three stocks:
First Watch Restaurant Group is a daytime dining restaurant concept serving made-to-order breakfast, brunch, and lunch using fresh ingredients. First Watch Restaurant currently carries a Zacks Rank #2. FWRG has an expected earnings growth rate of 172.7% for the current year.
NeoGenomics is a high-complexity CLIA-certified clinical laboratory that specializes in cancer genetics diagnostic testing, the fastest-growing segment of the laboratory industry. NeoGenomics, at present, carries a Zacks Rank #2. NEO has an expected earnings growth rate of 33.9% for the current year.
Universal Stainless & Alloy Products is a mini-mill that manufactures and markets semi-finished specialty steels, including stainless steel, tool, and other alloy steels. Universal Stainless & Alloy Products at present carries a Zacks Rank #2. USAP has an expected earnings growth rate of 121.6% for the current year.
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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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