Explore These 4 Momentum Stocks Using Driehaus Strategy

Investors with 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.

Portfolios such as the American Association of Individual Investors (“AAII”) have proved time and again that the strategy has the potential to offer high returns. Thus, investors with a high-risk appetite may opt for this strategy.

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.

Screening Parameters

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

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 7,698 stocks to only 35.

Here are four of the 35 stocks:

The Carlyle Group Inc. CG is an investment firm that specializes in both direct and fund of fund investments. It has a Momentum Score of A and a trailing four-quarter earnings surprise of 36.3%, on average.

Flagstar Bancorp, Inc. FBC is a holding company for Flagstar Bank. It has a Momentum Score of A. The trailing four-quarter earnings surprise is 33%, on average.

Jones Lang LaSalle Incorporated JLL is a professional services and investment management firm specializing in real estate. It has a Momentum Score of B and a four-quarter earnings surprise of more than 100%, on average.

ArcBest Corporation ARCB is a provider of freight transportation and integrated logistics services. It has a Momentum Score of B. The trailing four-quarter earnings surprise is 27.4%, 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.

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.

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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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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.