American businessman and fund manager, Richard Herman Driehaus developed an investment strategy based on the buy high and sell higher principle. This investment approach is ideal for investors having a tendency to take huge risk. Investors use this particular investment method to gain from momentum stocks. The success of this strategy helped Driehaus to make a 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 frames, respectively, compared with -1.1% and 4.2% returns registered by the S&P 500. Thus, investors with a high risk appetite might give the Driehaus strategy a thought to boost returns.
A Brief Note on 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 keeping with his insight, AAII took into account the percentage 50-day moving average as one of the key criteria before designing a portfolio.
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.
Our research shows that stocks with a Zacks Rank #1 or 2 (Buy) and a Momentum Score of A or B 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
(Ideal for taking advantage of momentum with the highest probability of success.)
These few parameters narrowed down the universe of over 7,872 stocks to only 20.
Here are five of the 20 stocks that passed the screen:
Johnson Outdoors Inc. (JOUT - Free Report) is a designer of outdoor equipment, diving, watercraft and marine electronics products. It has a Momentum Score of A and an average four-quarter positive earnings surprise of more than 100%.
RH (RH) is a retailer of home furnishing. It has a Momentum Score of A and an average four-quarter positive earnings surprise of 19.6%.
Northrop Grumman Corporation (NOC - Free Report) is a global security company for government and commercial customers. It has a Momentum Score of A and an average four-quarter positive earnings surprise of 13.9%.
ABIOMED, Inc. (ABMD - Free Report) is a developer of medical devices to assist or replace the pumping function of a failing heart. It has a Momentum Score of B and an average four-quarter positive earnings surprise of 22.8%.
Zebra Technologies Corporation (ZBRA - Free Report) is a designer of a range of automatic identification and data capture products. It has a Momentum Score of B and an average four-quarter positive earnings surprise of 11.8%.
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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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