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Go Driehaus Way: 5 Momentum Picks

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Richard Driehaus, a pioneer in momentum investing, developed a strategy that has the potential to yield impressive returns for those ready to gamble. The key rationale behind the strategy is "buy high and sell higher". Notably, the success of the investing strategy earned Driehaus a place in Barron’s All-Century Team. 

Portfolios built on Driehaus’ methodology have also proved to be profitable over a significant period of time. For instance, the American Association of Individual Investors’ (AAII) portfolio, which followed this strategy, returned 13.5% and 18.1% in the five- and 10- year timeframe, respectively, compared with -1.1% and 4.2% returns registered by the S&P 500.

Driehaus’ Strategy in Brief

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 designing a portfolio based on 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. 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 focused on strong earnings growth rates and impressive earnings projections to pick 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.

Screening Parameters

In order to make the strategy more profitable, we have considered only 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 12.

Here are five of the 12 stocks that passed the screen:

NVIDIA Corporation (NVDA - Free Report) designs, develops and markets a top-to-bottom family of award-winning 3D graphics processors, graphics processing units and related software. The company has a Momentum Score of ‘A’ and an average four-quarter positive earnings surprise of 24.9%.

Sucampo Pharmaceuticals, Inc. focuses on the research and development of proprietary drugs for the treatment of gastrointestinal, ophthalmic, autoimmune, and oncology-based inflammatory disorders. The company has a Momentum Score of ‘A’ and an average four-quarter positive earnings surprise of 35.6%.

Calavo Growers, Inc. (CVGW - Free Report) engages in the procurement and marketing of avocados and other perishable foods and the preparation and distribution of processed avocado products. The company has a Momentum Score of ‘B’ and an average four-quarter positive earnings surprise of 11.8%.

Tucows Inc. (TCX - Free Report) provides network access, domain names and other Internet services. The company has a Momentum Score of ‘B’ and an average four-quarter positive earnings surprise of 11%.

E*TRADE Financial Corporation provides brokerage and related products and services primarily to individual retail investors. The company has a Momentum Score of ‘B’ and an average four-quarter positive earnings surprise of 22.8%.

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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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