An active investor should always search for breakout stocks or stocks whose prices are fluctuating within a specific band. It’s judicious to unburden the stock if it falls below the lower bound of this band. Similarly, once the stock breaks above this channel, it will have all chances of delivering strong gains.

Zeroing in on Breakout Stocks

To select the right breakout stock, one has to first 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 at which it trades 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, meaning they would like to add them to their portfolio. 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.

Has a 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.

Screening Parameters

• 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.)

Whether the market is good or bad, stocks with a Zacks Rank #1 (Strong Buy) or 2 (Buy) have a proven history of outperformance.

• 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 that are reasonably priced.)

These criteria narrow down the universe of more than 7,706 stocks to only 22.

Here are three of the 22 stocks that passed the screen:

First Watch Restaurant Group FWRG is a daytime dining restaurant concept serving made-to-order breakfast, brunch and lunch using fresh ingredients. First Watch Restaurant currently sports a Zacks Rank #1. FWRG has an expected earnings growth rate of 181.8% for the current year.

VersaBank VBNK provides deposit and lending solutions for financial intermediaries as well as internally developed IT security software. VersaBank currently sports a Zacks Rank #1. VBNK has an expected earnings growth rate of 96.7% for the current year.

Amicus Therapeutics FOLD is a global patient-centric biotechnology company. Amicus Therapeutics currently carries a Zacks Rank #2. FOLD has an expected earnings growth rate of 41.5% for the current year.

Amicus Therapeutics, Inc. (FOLD): Free Stock Analysis Report

VersaBank (VBNK): Free Stock Analysis Report

First Watch Restaurant Group, Inc. (FWRG): Free Stock Analysis Report

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