First September Gains in 5 Years? Buy 3 Breakout Stocks Now

September has always been the worst month for the stock market. In early September, stocks gyrated as investors were concerned about a cooling U.S. economy. However, things have begun to improve following the Federal Reserve's half-point interest rate cut that restored faith in economic strength. 

According to the Dow Jones Market Data, the S&P 500, the Dow and the Nasdaq have gained more than 1% this month and are about to crush their dismal September run for the first time in five years. And since stocks are well-poised to diverge from a discouraging historical trend, it's prudent for astute investors to place their bets on breakout stocks that can take advantage of the stock market's largely broader upward movement. 

To pick breakout stocks, investors should zero in on stocks whose prices vary within a narrow band. If the stock price falls below this channel, it could be the best time to sell it off. However, the best time to buy a stock per this strategy is when it is about to break above this trading band. Such stocks offer the prospect of impressive gains.

To that end, Bioventus Inc. BVS, Great Lakes Dredge & Dock Corporation GLDD and AxoGen, Inc. AXGN have been selected as the breakout stocks for today.

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 it trades within 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 it to their portfolio. 

Has a Genuine Breakout Happened?

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 Criteria Using Research Wizard:

• 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.)

No matter 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 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 15. Here are the top three stocks:

Bioventus 

Bioventus delivers clinically proven, cost-effective products that help people heal quickly and safely. BVS has an expected earnings growth rate of 1,900% for the current year. BVS currently has a Zacks Rank #1.

Great Lakes Dredge & Dock 

Great Lakes Dredge & Dock is the largest provider of dredging services in the United States. GLDD has an expected earnings growth rate of 471.4% for the current year. GLDD currently has a Zacks Rank #2.

AxoGen 

AxoGen engages in developing and marketing surgical solutions for peripheral nerves. AXGN has an expected earnings growth rate of 94.1% for the current year. AXGN currently has a Zacks Rank #2.

Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.

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