Investors who have the propensity to take higher risks can think of investing in 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. 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 shot to boost their returns.
A Detailed Look Into the 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 the 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.
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 7,677 stocks to only 27.
Here are five of the 27 stocks:
BP p.l.c. ( BP Quick Quote BP - Free Report) is engaged in the exploration and production of crude oil and natural gas; refining, marketing, supply and transportation; and manufacturing and marketing of petrochemicals. It has a Momentum Score of A and a trailing four-quarter earnings surprise of more than 43.4%, on average. Avis Budget Group, Inc. ( CAR Quick Quote CAR - Free Report) is a provider of vehicle rental services, with operations in more than seventy countries. It has a Momentum Score of A and a trailing four-quarter earnings surprise of more than 100%, on average. Diodes Incorporated ( DIOD Quick Quote DIOD - Free Report) is a manufacturer and supplier of high-quality discrete and analog semiconductor products, primarily to the communications, computing, industrial, consumer electronics and automotive markets. It has a Momentum Score of B. The trailing four-quarter earnings surprise is 10.1%, on average. Echo Global Logistics, Inc. is a provider of technology enabled transportation and supply chain management services. It has a Momentum Score of B. The trailing four-quarter earnings surprise is 47.5%, on average. Jones Lang LaSalle Incorporated ( JLL Quick Quote JLL - Free Report) is a provider of real estate and investment management services. It has a Momentum Score of B and a four-quarter earnings surprise of more than 100%, on average.
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. 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.