Richard Driehaus, a pioneer in momentum investing, came out with a strategy with high return prospects for investors not afraid of taking risks. The philosophy – "buying high and selling higher" – is the base of this strategy. Driehaus’ proven high profitability strategy made him popular throughout the investment world. Several well-known organizations including Barron recognized him as one of the top investors.
Separately, famous investing institutions such as the American Association of Individual Investors (AAII) found that Driehaus’ momentum strategy has the potential to offer healthy returns. According to AAII, the strategy generated returns of 13.5% and 18.1% in the five- and 10- year timeframe, respectively, against -1.1% and 4.2% returns registered by the S&P 500.
Driehaus’ Momentum Strategy
After studying Driehaus’ strategy thoroughly, AAII came to the conclusion that companies with impressive earnings growth rates and the potential to maintain the positive trend are its main focus. In addition to that, Driehaus gave precedence to those companies that have a solid track of beating expectations. Moreover, the strategy works better for longer time periods.
Driehaus had said in an interview: “That means buying stocks that have already had good moves and have high relative strength – that is, stocks in demand by other investors. 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.”
How to Apply the Strategy
Based on Driehaus’ approach, we have created a screen for picking solid momentum stocks. In it, we have added positive relative strength as an important criterion. Then, we have followed it up with the percentage 50-day moving average – which 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 month-end price). 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.
In order to make the strategy more profitable, we have 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.)
These few parameters narrowed down the universe of over 7,700 stocks to only 10.
Here are five of the 10 stocks:
MGM Resorts International (MGM - Free Report) is a global hospitality company, operating a portfolio of destination resort brands. It has a Momentum Score of ‘A’. MGM Resorts has an average four-quarter positive earnings surprise of more than 100%.
Stamps.com Inc. (STMP - Free Report) provides easy, convenient and cost-effective Internet -based services. It has a Momentum Score of ‘A’. Stamps.com has an average four-quarter positive earnings surprise of 66.7%.
Willdan Group, Inc. (WLDN - Free Report) is a provider of professional technical and consulting services. It has a Momentum Score of ‘A’. Willdan Group has an average four-quarter positive earnings surprise of 18.7%.
Northrop Grumman Corporation (NOC - Free Report) is a high technology company providing innovative solutions in systems integration, defense electronics and information technology. It has a Momentum Score of ‘A’. Northrop Grumman has an average four-quarter positive earnings surprise of 8.3%.
Sandy Spring Bancorp Inc. (SASR - Free Report) is a bank holding company for Sandy Spring National Bank of Maryland. The bank is community oriented, and conducts a full-service commercial banking business. It has a Momentum Score of ‘B’. Sandy Spring Bancorp has an average four-quarter positive earnings surprise of 14.4%.
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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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