Back to top

Image: Shutterstock

5 Top-Ranked Momentum Picks Using Driehaus Strategy

Read MoreHide Full Article

Richard Herman Driehaus used the "buy high and sell higher" rule to create an investment approach. Investors, who have a high level of risk appetite, may consider using this particular investment strategy. Investors principally invest in momentum stocks using the Driehaus strategy. The success of this investment approach eventually helped Richard Driehaus win a place in Barron’s All-Century Team.

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 shot 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.

Screening Parameters

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 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 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 the market is good 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 7,596 stocks to only 23.

Here are five of the 23 stocks:

Danaher Corporation (DHR - Free Report) is the designer and manufacturer of professional, medical, industrial, and commercial products and services across the world. It has a Momentum Score of A and a trailing four-quarter earnings surprise of more than 27.5%, on average.

Clearfield, Inc. (CLFD - Free Report) offers the FieldSmart fiber management platform, which includes its latest generation Fiber Distribution System and Fiber Scalability Center. It has a Momentum Score of A and a trailing four-quarter earnings surprise of 49%, on average.

HCA Healthcare, Inc. (HCA - Free Report) is the owner and operator of general, acute care hospitals that offer medical and surgical services in the United States. It has a Momentum Score of A. The trailing four-quarter earnings surprise is 11.7%, on average.

First BanCorp. (FBP - Free Report) is the bank holding company for FirstBank Puerto Rico. It has a Momentum Score of B. The trailing four-quarter earnings surprise is 17.1%, on average.

Sleep Number Corporation (SNBR - Free Report) is the designer, manufacturer, retailer and services of beds, pillows, sheets, and other bedding products under the Sleep Number brand. It has a Momentum Score of B and a four-quarter earnings surprise of 35%, 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.

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.