September is often considered a volatile month for the stock market, but this year, things are looking up. After a period of uncertainty caused by concerns about a cooling U.S. economy, the Federal Reserve’s recent interest rate cut has injected confidence back into the market. The S&P 500, Dow Jones, and Nasdaq have all shown positive gains this month, defying the usual September slump for the first time in five years.
This upward trend presents a prime opportunity for savvy investors to capitalize on breakout stocks – those poised for significant upward movement. The key is to identify stocks that exhibit a clear pattern of trading within a narrow band, known as their support and resistance levels. The support level marks the lowest price a stock is likely to fall to, while the resistance level indicates the maximum price it’s expected to reach within a given period.
When a stock breaks above its resistance level, it signals a potential breakout. However, it’s crucial to confirm this breakout’s legitimacy. A genuine breakout occurs when the former resistance level transforms into a new support level, signifying a sustained upward trajectory. This pattern is best confirmed by analyzing long-term price trends and observing how the trading channel is tested.
How to Identify Breakout Stocks
To uncover these promising candidates, investors can employ a multi-faceted screening process using the following criteria:
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Percentage Price Change:
Look for stocks that have experienced a significant price increase over the past four weeks (between 10% and 20%). This signals strong momentum without being overly excessive.*
Current Price / 52-Week High:
Target stocks that are currently trading at least 90% of their 52-week high (a current price/52-week high ratio of 0.9 or greater). This indicates a stock close to its peak performance.*
Zacks Rank:
Focus on stocks with a Zacks Rank of 2 (Buy) or 1 (Strong Buy). These ratings highlight stocks with a proven track record of outperformance.*
Beta:
Select stocks with a beta of 2 or less for the past 60 months. This indicates that the stock’s price fluctuations are greater than the overall market but within a reasonable range.*
Current Price:
Limit the search to stocks with a current price of $20 or less, ensuring affordability for a wider range of investors.By applying these criteria, a pool of potentially lucrative breakout stocks can be identified. Here are three examples of stocks that have emerged as top contenders for 2023:
Bioventus Inc. (BVS)
Bioventus specializes in delivering clinically proven, cost-effective products that accelerate healing. With an impressive expected earnings growth rate of 1,900% for the current year and a Zacks Rank of 1 (Strong Buy), BVS has the potential for significant gains.
Great Lakes Dredge & Dock Corporation (GLDD)
As the leading provider of dredging services in the United States, Great Lakes Dredge & Dock is well-positioned for growth. GLDD has an expected earnings growth rate of 471.4% for the current year and a Zacks Rank of 2 (Buy).
AxoGen, Inc. (AXGN)
AxoGen focuses on developing and marketing surgical solutions for peripheral nerves. With an expected earnings growth rate of 94.1% for the current year and a Zacks Rank of 2 (Buy), AXGN is a strong contender for breakout stock status.
While this strategy offers the potential for substantial returns, it’s essential to remember that investing in breakout stocks carries inherent risks. Careful research and a thorough understanding of the market are crucial for success. Always consult with a qualified financial advisor before making any investment decisions.
