Investors who love to take risk will always look for a strategy that can provide them with robust returns. One of the pioneers of momentum strategies, Richard Driehaus developed a strategy on the principle of "buy high and sell higher", which appears to be ideal for those who are willing to take risks in pursuit of higher returns. This strategy made Driehaus a well-known name in the investment world and earned him the honor of being a part of Barron’s All-Century Team.
Investment institutions also find the strategy fruitful. For instance, the American Association of Individual Investors’ (AAII) portfolio, which was built up on the basis of the Driehaus strategy, returned 13.5% and 18.1% in the five- and 10- year timeframe, respectively. This compares favorably with the S&P 500’s return of -1.1% and 4.2% during the same time frames.
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 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.
“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.
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) 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
(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.)
Just these few criteria narrowed down the universe of over 7,700 stocks to only 19.
Here are five of the 19 stocks:
Argan, Inc. provides inside premise wiring services to the federal government and also underground and aerial construction services. It has a Momentum Score of ‘A’. Argan has an average four-quarter positive earnings surprise of 13.3%.
Trinseo SA (TSE - Free Report) is a global materials company and manufacturer of plastics, latex and rubber. It boasts a Momentum Score of ‘A’. Trinseo has posted an average four-quarter positive earnings surprise of 11.6%.
Ormat Technologies, Inc. (ORA - Free Report) , involved in the development, manufacture, and marketing of innovative power systems, also has a Momentum Score of ‘A’. Ormat recorded an average four-quarter positive earnings surprise of 21.3%.
NVIDIA Corporation (NVDA - Free Report) designs, develops and markets 3D graphics processors, graphics processing units and related software. It has a Momentum Score of ‘B’. NVIDIA has posted an average four-quarter positive earnings surprise of 28.5%.
Innospec Inc. (IOSP - Free Report) is a major manufacturer and distributor of fuel additives and other specialty chemicals. Innospec has an average four-quarter positive earnings surprise of 15.2%. It has a Momentum Score of ‘B’.
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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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