Picking breakout stocks is one of the most favored methods for those utilizing an active investing approach since this strategy promises superlative returns. This method involved 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.

However, the best time to buy a stock as per this strategy is when it is about to break above this trading band. Such stocks offer the prospect of impressive gains.

Zeroing in on Breakout Stocks

In order 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 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.

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.

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 $20 (Stocks which are reasonably priced.)

These criteria narrow down the universe of over 7884 stocks to only 8.

Here are the top five stocks that meet these criteria:

Sanchez Midstream Partners LP (SNMP - Free Report) is focused on the acquisition, development and production of oil and natural gas properties and other integrated assets. Sanchez Midstream Partners’ expected earnings growth for the current year is more than 100%. Cloud Peak Energy carries a Zacks Rank #1 (Strong Buy). 

Tecnoglass Inc. (TGLS - Free Report) is engaged in manufacturing and selling architectural glass and windows and aluminium products for the residential and commercial construction industries. Tecnoglass has a Zacks Rank #2 (Buy) and its expected earnings growth for the current year is 30.2%.

Aeterna Zentaris Inc. (AEZS - Free Report) is a biopharmaceutical company focused on endocrine therapy and oncology. Aeterna Zentaris has a Zacks Rank #2 and its expected earnings growth for the current year is 48.7%.

Ardelyx, Inc. (ARDX - Free Report) is a clinical-stage biopharmaceutical company. It discovers, develops and commercializes small molecule therapeutics that work in the gastrointestinal tract to treat cardio-renal, GI and metabolic diseases. Ardelyx has a Zacks Rank #2 and its expected earnings growth for the current year is 22%.

Matrix Service Company (MTRX - Free Report) offers fabrication, infrastructure, construction, engineering and maintenance services to the energy and industrial sector. Matrix Service has a Zacks Rank #2 and its expected earnings growth for the current year is more than 100%.