Investors with high risk-tolerance can invest in momentum stocks in order to maximize their returns. In this context, the Driehaus strategy is used to select the best momentum stocks by using the “buy high and sell higher" principle. Following the success of the strategy, Richard Herman Driehaus earned his place in Barron’s All-Century Team.
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 fraames, respectively, compared with -1.1% and 4.2% gains registered by the S&P 500. Thus investors with a high risk appetite may opt for this strategy to boost their portfolio returns.
A Detailed Look 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 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 creating a portfolio following 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.
In order to make the strategy more profitable, we have considered only those stocks that have a Zacks Rank #1 (Strong Buy) or 2 (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 have narrowed down the universe of over 7,887 stocks to only 22.
Here are five of the 22 stocks:
ICU Medical, Inc. (ICUI - Free Report) is a developer of medical devices used in vascular therapy, critical care, and oncology applications worldwide.It has a Momentum Score of A and an average four-quarter positive earnings surprise of more than 100%.
KAR Auction Services, Inc. (KAR - Free Report) is a provider of used car auction and salvage auction services.It has a Momentum Score of A and an average four-quarter positive earnings surprise of 14.1%.
Sony Corporation (SNE - Free Report) is a developer of electronic equipment, instruments and devices. It has a Momentum Score of A and an average four-quarter positive earnings surprise of 79.8%.
The Goldman Sachs Group, Inc. (GS - Free Report) is a global an investment banking, securities and investment management company.It has a Momentum Score of A and an average four-quarter positive earnings surprise of 18.1%.
United Natural Foods, Inc. (UNFI - Free Report) is a distributor of natural, organic, and specialty foods and non-food products.It has a Momentum Score of B and an average four-quarter positive earnings surprise of 10.7%.
You can get the rest of the stocks on this list by signing up now for your 2-week free trial to the Research Wizard and start using this screen in your own trading. Further, you can also create your own strategies and test them first before taking the investment plunge.
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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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