For active investors who settle for nothing less than superlative returns, utilizing a breakout investment strategy come as a natural choice. This approach involves homing in on stocks trading within a tight range and buying them when they step out of this band. In keeping with this approach, they are offloaded whenever they move below this narrow band. If properly implemented, such a strategy could deliver impressive returns.

Spotting Prospective Candidates

In order to identify breakout stocks, you must first determine their resistance and support levels. A resistance level is the barrier which must be broken so as to be identified as a breakout stock. Meanwhile, a support level is the floor for the stock’s movement.

At the breakout level, demand for the stock has peaked, making it a natural choice for traders. On the other hand, when a stock hits the support floor, traders are eager to offload it. In order to spot breakout stocks, you would have to see which of these are on the brink of breaking the resistance barrier or those which have just breached this level.

Verifying Whether It’s for Real

Stocks which have breached their resistance level should ideally be in high demand among traders. But the test of whether this is a genuine breakout is whether 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 7878 stocks to only seven. Each of these have a Zacks Rank #2 (Buy). 

Here are the top five stocks that meet these criteria:

Ardelyx, Inc. (ARDX - Free Report) discovers, develops and commercializes small molecule therapeutics that work in the gastrointestinal tract to treat cardio-renal, GI and metabolic diseases. Ardelyx’s expected earnings growth for the current year is 7.9%.

Novavax, Inc. (NVAX - Free Report) is a specialty biopharmaceutical company engaged in the research, development and commercialization of proprietary products focused on women's health and infectious diseases. Its expected earnings growth for the current year is 40.8%.

BioScrip, Inc. (BIOS - Free Report) is a pure-play Infusion Service provider. BioScrip, in partnership with healthcare payors, pharmaceutical manufacturers, government agencies and physicians strives to deliver cost-effective programs to patients. The stock’s expected earnings growth for the current year is 19.1%.

Layne Christensen Company (LAYN - Free Report) provides drilling services and related products and services in four principal markets: water-related products and services, mineral exploration drilling, geotechnical construction and oil and gas services and production. Layne Christensen’s expected earnings growth for the current year is 69.9%.

Resonant Inc. (RESN - Free Report) is a development-stage company. It creates filter designs for radio frequency front-ends for the mobile device industry. Resonant’s expected earnings growth for the current year is 26.8%.