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Think Like Driehaus and Select These 5 Momentum Stocks
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Investors with greater tolerance for risk use strategies that help in offering attractive returns by investing primarily in momentum stocks. One such momentum strategy was formulated by Richard Driehaus, which was based on a "buy high and sell higher" principle. Driehaus, who was known as the pioneer of momentum investing, later earned a place in the Barron’s All-Century Team.
The American Association of Individual Investors (AAII) proved that the strategy has the potential to offer high returns. AAII’s portfolio, which was developed following the strategy, returned 13.5% and 18.1% in the five- and 10-year timeframes, respectively, compared with -1.1% and 4.2% returns registered by the S&P 500. Thus investors with a high risk appetite may opt for this strategy to boost their portfolio returns.
A Detailed Look into Driehaus’ Strategy
Regarding the strategy, Driehaus once said: “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.” In line with this insight, AAII took into account the percentage 50-day moving average as one of the key criteria before creating a portfolio following Driehaus’ philosophy.
It 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 the month-end price. Another momentum indicator – positive relative strength – has also been included in this strategy. A 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.
Moreover, AAII found that Driehaus primarily focuses on strong earnings growth rates and impressive earnings projections to pick potential outperformers. Companies with a strong history of beating estimates are also given importance in this strategy, which was made to provide better returns over the long term.
Screening Parameters
In order to make the strategy more profitable, we have considered only those stocks that have a Zacks Rank #1 (Strong Buy) or 2 (Buy) and a momentum score of ‘A’ or ‘B’. Our research shows that stocks with a Style Scoreof ‘A’ or ‘B’ when combined with a Zacks Rank #1 or 2 offer the best upside potential.
(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 have narrowed down the universe of over 7,890 stocks to only 17.
Here are five of the 17 stocks:
China Lodging Group, Limited (HTHT - Free Report) is a hotel management company based in China. China Lodging Grouphas a Momentum Score of ‘A’ and an average four-quarter positive earnings surprise of 36.4%.
Nova Measuring Instruments Ltd. (NVMI - Free Report) designs and sells process control systems in order to manufacture semiconductors. Nova Measuring Instrumentshas a Momentum Score of ‘A’ and an average four-quarter positive earnings surprise of 30.8%.
Graco Inc. (GGG - Free Report) designs equipments and systems to control, move and spray fluid and powder materials. Gracohas a Momentum Score of ‘B’ and an average four-quarter positive earnings surprise of 13.9%.
Dana Incorporated (DAN - Free Report) manufactures and sells thermal-management products. Dana has a Momentum Score of ‘B’ and an average four-quarter positive earnings surprise of 36%.
Kadant Inc. (KAI - Free Report) supplies components and equipment used in papermaking. Kadanthas a Momentum Score of ‘B’ and an average four-quarter positive earnings surprise of 25.5%.
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.
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Think Like Driehaus and Select These 5 Momentum Stocks
Investors with greater tolerance for risk use strategies that help in offering attractive returns by investing primarily in momentum stocks. One such momentum strategy was formulated by Richard Driehaus, which was based on a "buy high and sell higher" principle. Driehaus, who was known as the pioneer of momentum investing, later earned a place in the Barron’s All-Century Team.
The American Association of Individual Investors (AAII) proved that the strategy has the potential to offer high returns. AAII’s portfolio, which was developed following the strategy, returned 13.5% and 18.1% in the five- and 10-year timeframes, respectively, compared with -1.1% and 4.2% returns registered by the S&P 500. Thus investors with a high risk appetite may opt for this strategy to boost their portfolio returns.
A Detailed Look into Driehaus’ Strategy
Regarding the strategy, Driehaus once said: “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.” In line with this insight, AAII took into account the percentage 50-day moving average as one of the key criteria before creating a portfolio following Driehaus’ philosophy.
It 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 the month-end price. Another momentum indicator – positive relative strength – has also been included in this strategy. A 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.
Moreover, AAII found that Driehaus primarily focuses on strong earnings growth rates and impressive earnings projections to pick potential outperformers. Companies with a strong history of beating estimates are also given importance in this strategy, which was made to provide better returns over the long term.
Screening Parameters
In order to make the strategy more profitable, we have considered only those stocks that have a Zacks Rank #1 (Strong Buy) or 2 (Buy) and a momentum score of ‘A’ or ‘B’. Our research shows that stocks with a Style Scoreof ‘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 have narrowed down the universe of over 7,890 stocks to only 17.
Here are five of the 17 stocks:
China Lodging Group, Limited (HTHT - Free Report) is a hotel management company based in China. China Lodging Grouphas a Momentum Score of ‘A’ and an average four-quarter positive earnings surprise of 36.4%.
Nova Measuring Instruments Ltd. (NVMI - Free Report) designs and sells process control systems in order to manufacture semiconductors. Nova Measuring Instrumentshas a Momentum Score of ‘A’ and an average four-quarter positive earnings surprise of 30.8%.
Graco Inc. (GGG - Free Report) designs equipments and systems to control, move and spray fluid and powder materials. Gracohas a Momentum Score of ‘B’ and an average four-quarter positive earnings surprise of 13.9%.
Dana Incorporated (DAN - Free Report) manufactures and sells thermal-management products. Dana has a Momentum Score of ‘B’ and an average four-quarter positive earnings surprise of 36%.
Kadant Inc. (KAI - Free Report) supplies components and equipment used in papermaking. Kadanthas a Momentum Score of ‘B’ and an average four-quarter positive earnings surprise of 25.5%.
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 »