One of the best investment options for investors with a high risk appetite is momentum stocks. In this respect, we have used Driehaus strategy which was formulated, based on the "buy high and sell higher" principle. This effective momentum strategy helped the pioneer of momentum investing, Richard Driehaus to earn a place in Barron’s All-Century Team.
Portfolios such as that of The American Association of Individual Investors (AAII) proved that the strategy has the potential to offer high returns. AAII’s portfolio, which was developed following the strategy, returned 13.5% and 18.1% in the five and 10- year time frames, respectively, compared with -1.1% and 4.2% returns for the S&P 500. Thus, investors with a high risk appetite may opt for this strategy.
A Look at Driehaus’ Strategy
After a detailed study of the Driehaus’ strategy, AAII concluded that it mainly focuses on strong earnings growth rates and impressive prospects to pick potential outperformers. While this strategy was made to provide better returns over the longer haul, companies with a strong history of beating estimates were 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 had 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 those stocks that have a Zacks Rank #1 (Strong Buy) as well as 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 7,858 stocks to only 22.
Here are five of the 22 stocks:
Aaron's, Inc. (AAN - Free Report) is an omnichannel provider of lease-purchase solutions.The company has a Momentum Score of ‘B’ and an average four-quarter positive earnings surprise of 14%.
Allison Transmission Holdings, Inc. (ALSN - Free Report) is a manufacturer and seller of commercial and defense fully automatic transmissions for commercial vehicles.The company has a Momentum Score of ‘A’ and an average four-quarter positive earnings surprise of 32.1%.
Kadant Inc. (KAI - Free Report) is a supplier of equipment and components used in papermaking and paper recycling.The company has a Momentum Score of ‘A’ and an average four-quarter positive earnings surprise of 19.3%.
CBRE Group, Inc. is a commercial real estate services and investment company.The company has a Momentum Score of ‘A’ and an average four-quarter positive earnings surprise of 18.7%.
SJW Group (SJW - Free Report) is provider of water utility services in the U.S. The company has a Momentum Score of ‘B’ and an average four-quarter positive earnings surprise of 23.9%.
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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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