Momentum strategies that have the potential to offer healthy returns have always been the on radar of investors with a high risk appetite. The principle is "buy high and sell higher." Richard Driehaus is a pioneer investor who created profit-making strategies based on this philosophy. Barron paid tribute to Driehaus by including him in its All-Century Team.

Some of the investing institutions such as the American Association of Individual Investors (AAII) applied Driehaus’ momentum strategy to build up portfolios that bore fruit. A portfolio following this strategy provided returns of 13.5% and 18.1% in the five- and 10- year timeframe, respectively, in contrast to -1.1% and 4.2% returns registered by the S&P 500, as per AAII.

Investing the Driehaus Way

After a detailed study of Driehaus’ strategy, AAII concluded that it mainly focuses on strong earnings growth rates and impressive prospects of delivering the same in the future in order to pick potential companies. While this strategy was made to provide better returns over longer time frames, companies with a strong history of beating estimates are also given importance in this strategy.

“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 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 only considered only those stocks that have a Zacks Rank #1 (Strong Buy) or 2 (Buy) as well as a momentum score of ‘A’. 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 or less than #2
(Only Strong Buy and Buy rated stocks can get through.)

• 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 A
(Favorable momentum score indicates that it is ideal to take advantage of the momentum with the highest probability of success.)

Just these few criteria narrowed down the universe of over 7,700 stocks to only 13.

Here are five of the 13 stocks:

Ligand Pharmaceuticals Incorporated (LGND Quick QuoteLGND - Free Report) discovers, develops and markets new drugs that address critical unmet medical needs of patients. In addition to a Zacks Rank #1, Ligand also has an average four-quarter positive earnings surprise of 36.7%.

Ormat Technologies, Inc. (ORA Quick QuoteORA - Free Report) brings three decades of experience in the development, manufacture and marketing of innovative power systems. In addition to a Zacks Rank #1, Ormat has an average four-quarter positive earnings surprise of 21.3%.

Activision Blizzard, Inc. is a worldwide pure-play online and console game publisher with leading market positions across all categories of the rapidly growing interactive entertainment software industry. In addition to a Zacks Rank #2, Activision Blizzard also has an average four-quarter positive earnings surprise of 33.5%.

Boise Cascade Company (BCC Quick QuoteBCC - Free Report) operates as a wood products manufacturer and building materials distributor. In addition to a Zacks Rank #2, Boise Cascade also has an average four-quarter positive earnings surprise of more than 100%.

Ubiquiti Networks, Inc. is engaged in the business of designing, manufacturing and selling broadband wireless solutions worldwide. In addition to a Zacks Rank #2, Boise Cascade has an average four-quarter positive earnings surprise of 13.2%.

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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.

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