Richard Herman Driehaus who is a well-known American businessman and fund manager, developed an investment approach based on the buy high and sell higher rule. This investment strategy is perfect for investors with an inclination toward enormous risk-taking. Using this strategy, investors gain from momentum stocks. Following the success of this investment plan, Driehaus was able to attain 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 7,871 stocks to only 20.
Here are five of the 20 stocks that passed the screen:
Medifast, Inc. (MED - Free Report) is a distributor of weight loss, weight management and healthy living products. It has a Momentum Score of A and an average four-quarter positive earnings surprise of 16.6%.
Continental Building Products, Inc. (CBPX - Free Report) is a seller of gypsum wallboard and complementary finishing products. It has a Momentum Score of A and an average four-quarter positive earnings surprise of 14.9%.
Huntsman Corporation (HUN - Free Report) is a global manufacturer of differentiated organic chemical products. It has a Momentum Score of A and an average four-quarter positive earnings surprise of 22.5%.
Logitech International S.A. (LOGI - Free Report) is a marketer of products that allow people to connect through music, gaming, video and other digital platforms. It has a Momentum Score of B and an average four-quarter positive earnings surprise of 19.1%.
Allison Transmission Holdings, Inc. (ALSN - Free Report) is a seller of commercial and defense fully-automatic transmissions for medium- and heavy-duty vehicles. It has a Momentum Score of B and an average four-quarter positive earnings surprise of 39.8%.
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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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