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Momentum strategies have always grabbed the attention of risk loving investors due to their potential to yield solid returns. However, choosing a fruitful strategy may prove to be difficult as the risk level is pretty high. Hence, it may be a wise thing to follow well known investment gurus like Richard Driehaus, who is a pioneer in momentum investing, to avoid picking wrong strategies.
Driehaus’ proven high profitability strategy made him popular throughout the investment world. Several well-known organizations including Barron recognized him as one of the top investors. Hence, we have developed a stock picking screen following Driehaus’ strategy, which has a proven track record of yielding high returns.
Driehaus’ Momentum Strategy
After studying Driehaus’ strategy thoroughly, AAII came to the conclusion that companies with impressive earnings growth rates and the potential to maintain the positive trend are its main focus. In addition to that, Driehaus gave precedence to those companies that have a solid track of beating expectations. Moreover, the strategy works better for longer time periods.
Driehaus had said in an interview: “That means buying stocks that have already had good moves and have high relative strength – that is, stocks in demand by other investors. I would much rather invest in a stock that’s increasing in price and take the risk that it may begin to decline than invest in a stock that’s already in a decline and try to guess when it will turn around.”
How to Apply the Strategy
Based on Driehaus’ approach, we have created a screen for picking solid momentum stocks. In it, we have added positive relative strength as an important criterion. Then, we have followed it up with the percentage 50-day moving average – which is calculated by dividing the numerator (month-end price minus 50-day moving average of month-end price by the 50-day moving average of month-end price). Positive percentage 50-day moving average indicates that the stock is trading at a price higher than its 50-day moving average level, indicating an uptrend.
Screening Parameters
In order to make the strategy more profitable, we have considered only those stocks that have a Zacks Rank #1 (Strong Buy) and a momentum score of ‘A’ or ‘B’. Our research shows that stocks with a Style Score of ‘A’ or ‘B’ when combined with a Zacks Rank #1 or 2 offer the best upside potential.
• Last 5-year average EPS growth rates above 2% (Strong EPS growth history ensures improving business.)
• Trailing 12 month EPS growth higher than 0 and industry median (Higher EPS growth compared to the industry average indicates superior stocks.)
• Last four-quarter average EPS surprise greater than 5% (Positive EPS surprise indicates potential.)
• Positive % 50-day moving average and relative strength over 4 weeks (High % 50-day moving average and relative strength signal uptrend.)
• Momentum Score equal to or less than B (Favorable momentum score indicates that it is ideal to take advantage of the momentum with the highest probability of success.)
These few parameters narrowed down the universe of over 7,700 stocks to only 12.
Here are five of the 12 stocks:
NVE Corporation (NVEC - Free Report) is a recognized leader in the practical commercialization of spintronics. The company has a Momentum Score of ‘A’ and an average four-quarter positive earnings surprise of 14.1%.
The Goldman Sachs Group, Inc. (GS - Free Report) is a global investment banking and securities firm. The company has a Momentum Score of ‘A’ and an average four-quarter positive earnings surprise of 15.3%.
Thor Industries, Inc. (THO - Free Report) manufactures a wide range of recreational vehicles (RVs). The company has a Momentum Score of ‘B’ and an average four-quarter positive earnings surprise of 24.1%.
Rogers Corporation (ROG - Free Report) manufactures and sells specialty polymer composite materials and components. The company has a Momentum Score of ‘B’ and an average four-quarter positive earnings surprise of 37.2%.
Cincinnati Financial Corporation (CINF - Free Report) offers property and casualty insurance. The company has a Momentum Score of ‘B’ and an average four-quarter positive earnings surprise of 11.8%.
Get the rest of the stocks on the list and start putting this and other ideas to the test. It can all be done with the Research Wizard stock picking and backtesting software.
The Research Wizard is a great place to begin. It's easy to use. Everything is in plain language. And it's very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.
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.
Zacks Restaurant Recommendations: In addition to dining at these special places, you can feast on their stock shares. A Zacks Special Report spotlights 5 recent IPOs to watch plus 2 stocks that offer immediate promise in a booming sector. Download it free »
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5 Momentum Stocks Following Driehaus' Rule
Momentum strategies have always grabbed the attention of risk loving investors due to their potential to yield solid returns. However, choosing a fruitful strategy may prove to be difficult as the risk level is pretty high. Hence, it may be a wise thing to follow well known investment gurus like Richard Driehaus, who is a pioneer in momentum investing, to avoid picking wrong strategies.
Driehaus’ proven high profitability strategy made him popular throughout the investment world. Several well-known organizations including Barron recognized him as one of the top investors. Hence, we have developed a stock picking screen following Driehaus’ strategy, which has a proven track record of yielding high returns.
Driehaus’ Momentum Strategy
After studying Driehaus’ strategy thoroughly, AAII came to the conclusion that companies with impressive earnings growth rates and the potential to maintain the positive trend are its main focus. In addition to that, Driehaus gave precedence to those companies that have a solid track of beating expectations. Moreover, the strategy works better for longer time periods.
Driehaus had said in an interview: “That means buying stocks that have already had good moves and have high relative strength – that is, stocks in demand by other investors. I would much rather invest in a stock that’s increasing in price and take the risk that it may begin to decline than invest in a stock that’s already in a decline and try to guess when it will turn around.”
How to Apply the Strategy
Based on Driehaus’ approach, we have created a screen for picking solid momentum stocks. In it, we have added positive relative strength as an important criterion. Then, we have followed it up with the percentage 50-day moving average – which is calculated by dividing the numerator (month-end price minus 50-day moving average of month-end price by the 50-day moving average of month-end price). Positive percentage 50-day moving average indicates that the stock is trading at a price higher than its 50-day moving average level, indicating an uptrend.
Screening Parameters
In order to make the strategy more profitable, we have considered only those stocks that have a Zacks Rank #1 (Strong Buy) and a momentum score of ‘A’ or ‘B’. Our research shows that stocks with a Style Score of ‘A’ or ‘B’ when combined with a Zacks Rank #1 or 2 offer the best upside potential.
• Zacks Rank equal to #1
(Only Strong Buy rated stocks can get through. You can see the complete list of today’s Zacks #1 Rank stocks here.)
• Last 5-year average EPS growth rates above 2%
(Strong EPS growth history ensures improving business.)
• Trailing 12 month EPS growth higher than 0 and industry median
(Higher EPS growth compared to the industry average indicates superior stocks.)
• Last four-quarter average EPS surprise greater than 5%
(Positive EPS surprise indicates potential.)
• Positive % 50-day moving average and relative strength over 4 weeks
(High % 50-day moving average and relative strength signal uptrend.)
• Momentum Score equal to or less than B
(Favorable momentum score indicates that it is ideal to take advantage of the momentum with the highest probability of success.)
These few parameters narrowed down the universe of over 7,700 stocks to only 12.
Here are five of the 12 stocks:
NVE Corporation (NVEC - Free Report) is a recognized leader in the practical commercialization of spintronics. The company has a Momentum Score of ‘A’ and an average four-quarter positive earnings surprise of 14.1%.
The Goldman Sachs Group, Inc. (GS - Free Report) is a global investment banking and securities firm. The company has a Momentum Score of ‘A’ and an average four-quarter positive earnings surprise of 15.3%.
Thor Industries, Inc. (THO - Free Report) manufactures a wide range of recreational vehicles (RVs). The company has a Momentum Score of ‘B’ and an average four-quarter positive earnings surprise of 24.1%.
Rogers Corporation (ROG - Free Report) manufactures and sells specialty polymer composite materials and components. The company has a Momentum Score of ‘B’ and an average four-quarter positive earnings surprise of 37.2%.
Cincinnati Financial Corporation (CINF - Free Report) offers property and casualty insurance. The company has a Momentum Score of ‘B’ and an average four-quarter positive earnings surprise of 11.8%.
Get the rest of the stocks on the list and start putting this and other ideas to the test. It can all be done with the Research Wizard stock picking and backtesting software.
The Research Wizard is a great place to begin. It's easy to use. Everything is in plain language. And it's very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.
Click here to sign up for a free trial to the Research Wizard today.
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.
Disclosure: Performance information for Zacks’ portfolios and strategies are available at: https://www.zacks.com/performance.
Zacks Restaurant Recommendations: In addition to dining at these special places, you can feast on their stock shares. A Zacks Special Report spotlights 5 recent IPOs to watch plus 2 stocks that offer immediate promise in a booming sector. Download it free »