Richard Herman Driehaus, renowned American businessman and fund manager, created an investment approach using the buy high and sell higher theory. This strategy is perfect for investors who have the propensity to take high levels of risk. Using this particular strategy, investors can buy momentum stocks. The eventual success of this investment strategy helped Driehaus earn 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 their 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 (Strong Buy) or 2 (Buy) and a Momentum Score of A or B offer the best upside potential.
• Zacks Rank equal to #1
No matter whether the market is good 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 6,859 stocks to only 19.
Here are five of the 19 stocks:
Atlas Air Worldwide Holdings, Inc. AAWW is a provider of outsourced aircraft and aviation operating services. It has a Momentum Score of A and a trailing four-quarter earnings surprise of more than 100%, on average.
Danaher Corporation DHR is a designer and manufacturer of professional, medical, industrial, and commercial products and services. It has a Momentum Score of A and a trailing four-quarter earnings surprise of 17%, on average.
TopBuild Corp. BLD is an installer and distributor of insulation and other building products to the United States construction industry. It has a Momentum Score of B and a four-quarter earnings surprise of 16%, on average.
National Beverage Corp. FIZZ is a developer, producer and seller of sparkling waters, juices, energy drinks, and carbonated soft drinks. It has a Momentum Score of A. The trailing four-quarter earnings surprise is 26.6%, on average.
Group 1 Automotive, Inc. GPI is a seller of new and used cars, light trucks, and vehicle parts, as well as service insurance contracts. It has a Momentum Score of A. The trailing four-quarter earnings surprise is 98.1%, on average.
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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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Danaher Corporation (DHR): Free Stock Analysis Report
Group 1 Automotive, Inc. (GPI): Free Stock Analysis Report
National Beverage Corp. (FIZZ): Free Stock Analysis Report
Atlas Air Worldwide Holdings (AAWW): Free Stock Analysis Report
TopBuild Corp. (BLD): Free Stock Analysis Report
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