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 bent on 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. 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.
In addition to the 50-day moving average and relative strength, we have considered a few parameters for picking the best stocks. As companies with a strong history of beating estimates usually outperform the market, we have added this parameter to our screen. Also, 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 or 2 offer the best upside potential.
• Zacks Rank equal to #1
No matter whether good market 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 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 50-day moving average and relative strength signal uptrend
• Momentum Score equal to or less than B
A 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 6,809 stocks to only nine.
Here are four of the nine stocks:
BWX Technologies, Inc. (BWXT - Free Report) is a manufacturer and seller of nuclear components. It has a Momentum Score of A. The trailing four-quarter positive earnings surprise is 19.8%, on average.
Emergent BioSolutions Inc. (EBS - Free Report) is the owner and operator of a life sciences company. It has a Momentum Score of A and a trailing four-quarter positive earnings surprise of 29.9%, on average.
Fortinet, Inc. (FTNT - Free Report) is a provider of broad, integrated and automated cybersecurity solutions. It has a Momentum Score of A and a trailing four-quarter positive earnings surprise of 65%, on average.
Helen of Troy Limited (HELE - Free Report) is a designer, developer and distributor of a portfolio of consumer products. It has a Momentum Score of B and a four-quarter positive earnings surprise of 16.2%, on average.
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.