Investors who have the propensity to take higher risk can think of investing in momentum stocks to boost their gains. In this respect, the Driehaus strategy can be used to choose the best momentum stocks using the “buy high and sell higher" theory. Eventually, Richard Herman Driehaus earned his place in Barron’s All-Century Team following the success of this investment strategy.
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% 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 7,867 stocks to only 20.
Here are five of the 20 stocks:
Allison Transmission Holdings, Inc. (ALSN - Free Report) is a designer of commercial and defense fully automatic transmissions for medium- and heavy-duty vehicles. It has a Momentum Score of A and an average four-quarter positive earnings surprise of 41.1%.
Westlake Chemical Corporation (WLK - Free Report) is a manufacturer of basic chemicals, vinyls, polymers and building products. It has a Momentum Score of A and an average four-quarter positive earnings surprise of 5.9%.
Microchip Technology Incorporated (MCHP - Free Report) is a manufacturer of semiconductor products for various embedded control applications. It has a Momentum Score of A and an average four-quarter positive earnings surprise of 3.9%.
M.D.C. Holdings, Inc. (MDC - Free Report) is a homebuilding and financial service company. It has a Momentum Score of B and an average four-quarter positive earnings surprise of 31.5%.
Shoe Carnival, Inc. (SCVL - Free Report) is a family footwear retailer in the United States. It has a Momentum Score of B and an average four-quarter positive earnings surprise of 21.3%.
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.
The Research Wizard is a great place to begin. It's easy to use. Everything is in plain language. And it's very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.
Click here to sign up for a free trial to the Research Wizard today.
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.
Zacks Restaurant Recommendations: In addition to dining at these special places, you can feast on their stock shares. A Zacks Special Report spotlights 5 recent IPOs to watch plus 2 stocks that offer immediate promise in a booming sector. Download it free »