August has been positive for the stock market; however, September has traditionally been a weak month for stocks. In this environment, investors must adopt a more cautious and selective approach to stock selection, identifying companies with strong fundamentals and the potential to break out from well-defined trading ranges.
Under this strategy, investors should consider selling a stock if it falls below the lower end of its trading range, as this could indicate further downside. Conversely, a move above the upper end of the range signals improving momentum and a potential breakout, and an opportunity to capture additional gains.
Using this framework, AMC Global Media Inc. AMCX, Clarus Corporation CLAR and Lifetime Brands, Inc. LCUT emerge as potential breakout stocks now.
Identifying Breakout Stocks to Enhance Portfolio Returns
To pick a breakout stock, calculate support and resistance levels. A support level is the lower bound of price movement, while a resistance level is its upper bound.
In other words, demand for a stock is lowest at its support level, meaning most traders are willing to sell it. At the resistance level, most traders are willing to go long on the stock, suggesting they would like to add it to their portfolios. 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 resistance.
Has the Stock Confirmed Its Breakout?
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 established trading channel 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.
Research Wizard: Stock Screening Criteria
• 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.)
Regardless of market strength, stocks with a Zacks Rank of #1 (Strong Buy) or 2 (Buy) have a proven track record of outperforming the market. 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 more than the broader market but within a reasonable limit.)
• Current price less than or equal to $20 (Stocks reasonably priced)
These criteria narrow the universe of more than 6,853 stocks to only 16.
Here are the top three stocks:
AMC Global Media
AMC Global Media is a media and entertainment company that distributes content across the United States, Europe and other international markets. AMC Global Media has a Zacks Rank #1. AMCX’s expected earnings growth rate for the current quarter and year is 616.7% and 36.5%, respectively.
Clarus
Clarus designs, manufactures, and distributes outdoor equipment and lifestyle products in the U.S. and international markets. Clarus has a Zacks Rank #2. CLAR’s expected earnings growth rate for the current quarter and year is 20% and 220%, respectively.
Lifetime Brands
Lifetime Brands sells branded kitchenware, tableware and home products in the United States and internationally. Lifetime Brands has a Zacks Rank #1. LCUT’s expected earnings growth rate for the current quarter and year is 90.9% and 156.8%, respectively.
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This article originally published on Zacks Investment Research (zacks.com).
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