As May gets underway, investors seeking outsized returns should focus on the strongest momentum stocks. To identify stocks with further upside, they can apply Richard Driehaus’s celebrated “buy high and sell higher” strategy, which secured his place on Barron’s All-Century Team.

By applying the Driehaus strategy, The Vita Coco Company, Inc. (COCO Quick QuoteCOCO - Free Report) , Indivior Pharmaceuticals, Inc. (INDV Quick QuoteINDV - Free Report) , and Marathon Petroleum Corporation (MPC Quick QuoteMPC - Free Report) have emerged as strong momentum plays and attractive buying opportunities.

A Deep Dive Into the Driehaus Strategy

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 decline and try to guess when it will turn around.” In line with this insight, the American Association of Individual Investors (“AAII”) considered the 50-day moving average as one of the key criteria when creating a portfolio in line with 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 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. 

Moreover, AAII found that Driehaus primarily focuses 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 Using Research Wizard: 

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, offer the best upside potential.

• Zacks Rank equal to #1 

No matter whether the market is good or bad, stocks with a Zacks Rank #1 have a proven history of outperformance. 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 an improving business

• Trailing 12-month EPS growth greater than 0 and industry median

Higher EPS growth compared to the industry average indicates superior earnings performance 

• Last four-quarter average EPS surprise greater than 5%

Solid EPS surprise history indicates better price performance

• Positive percentage change in 50-day moving average and relative strength over 4 weeks

Positive percentage change in the 50-day moving average and the relative strength signal uptrend

• Momentum Score equal to or less than B

A favorable momentum score indicates that it is ideal to capitalize on the momentum with the highest probability of success. 

These few parameters have narrowed the universe of more than 7,743 stocks to only 15.

Here are three of the 15 stocks:

The Vita Coco Company

The Vita Coco Company markets Vita Coco-branded coconut water products across global markets. It has a Momentum Score of A. The trailing four-quarter earnings surprise for COCO is 11.7%, on average.

Indivior Pharmaceuticals

Indivior Pharmaceuticals develops and sells buprenorphine-based treatments for opioid dependence worldwide. It has a Momentum Score of A. The trailing four-quarter earnings surprise for INDV is 65.4%, on average.

Marathon Petroleum 

Marathon Petroleum is a U.S.-based integrated downstream energy company. It has a Momentum Score of B. The trailing four-quarter earnings surprise for MPC is 49.5%, on average.