Investors with the propensity to take higher risks can pick momentum stocks to boost their gains. In this respect, the Driehaus strategy can be used to choose the best momentum stocks using the “buy high and sell higher" theory. After all, Richard Herman Driehaus earned his place in Barron’s All-Century Team following the success of this investment strategy.
The American Association of Individual Investors (AAII) proved that the strategy has the potential to offer high returns. Thus, investors with a high-risk appetite might give the Driehaus strategy a thought to boost their returns.
A Look at Driehaus’ Strategy
After a detailed study of the Driehaus’ strategy, AAII concluded that it mainly focuses on strong earnings growth rates and impressive prospects to pick potential outperformers. While this strategy was made to provide better returns over the longer haul, companies with a strong history of beating estimates were also given importance.
“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,” Driehaus had said in an interview.
The percentage 50-day moving average is one of the key criteria 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. 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.
In order to make the strategy more profitable, we have only considered those stocks that have a Zacks Rank #1 (Strong Buy) as well as 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
No matter whether good market or bad, stocks with a Zacks Rank #1 have a proven history of outperformance. 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 greater than 0 and industry median
Higher EPS growth compared to the industry average indicates superior earnings performance
• Last four-quarter average EPS surprise greater than 5%
Solid EPS surprise history indicates better price performance
• Positive percentage change in 50-day moving average and relative strength over 4 weeks
Positive percentage change in 50-day moving average and relative strength signal uptrend
• Momentum Score equal to or less than B
A 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 6,853 stocks to only 23.
Here are four of the 31 stocks:
Atlas Air Worldwide Holdings, Inc. (AAWW - Free Report) is a provider of outsourced aircraft and aviation operating services. It has a Momentum Score of B and a trailing four-quarter earnings surprise of more than 100%, on average.
Etsy, Inc. (ETSY - Free Report) is the owner and operator of online market places for buyers and sellers. It has a Momentum Score of A and a trailing four-quarter earnings surprise of 20.3%, on average.
Generac Holdings Inc. (GNRC - Free Report) is the manufacturer and seller of power generation equipment, energy storage systems, and other power products. It has a Momentum Score of A and a four-quarter earnings surprise of 22.2%, on average.
Lithia Motors, Inc. (LAD - Free Report) is an automotive retailer in the United States. It has a Momentum Score of A. The trailing four-quarter earnings surprise is 11.9%, on average.
You can get the rest of the stocks on this list by signing up now for your 2-week free trial to the Research Wizard and start using this screen in your own trading. Further, you can also create your own strategies and test them first before taking the investment plunge.
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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.