Investors with high risk appetite always bank on momentum strategies that are poised to provide healthy returns. Momentum strategies are based on the practice of "buying high and selling higher." Richard Driehaus, a popular momentum investor, developed a strategy based on this practice.
Owing to the success of Driehaus' strategy, Barron honored him by including his name in its All-Century Team. Meanwhile, based on the healthy returns provided by the portfolio built in accordance with the strategy, the American Association of Individual Investors (AAII) also confirmed that a risk lover can bet on Driehaus' strategy to earn impressive returns.
After studying Driehaus' strategy thoroughly, AAII concluded that it focuses on companies with impressive earnings growth rates and the potential to maintain the positive trend. The strategy also gives emphasis to companies that have a solid track of beating expectations. Moreover, it works better for longer time periods.
Driehaus had said in an interview: "That means buying stocks that have already had good moves and have high relative strength - that is, stocks in demand by other investors. 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."
How to Apply the Strategy
Based on Driehaus' approach, we have created a screen for picking solid momentum stocks. To it, we have added positive relative strength as an important criterion. We have backed it up with the percentage 50-day moving average - which 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 month-end price). 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.
In order to make the strategy more profitable, we have only considered stocks with a Zacks Rank #1 (Strong Buy) and a momentum score of 'A'. Our research shows that stocks with a Style Score of 'A' or 'B' when combined with a Zacks Rank #1 or #2 (Buy) 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 A
Just these few criteria narrowed down the universe of over 7,700 stocks to only 18.
Here are five of the 18 stocks:
Sanderson Farms, Inc.SAFM is a fully-integrated poultry processing company engaged in the production, processing, marketing and distribution of fresh and frozen chicken products. Sanderson Farms has an average four-quarter positive earnings surprise of 25%.
Edwards Lifesciences Corp.EW provides products and technologies to treat late-stage cardiovascular disease. Edwards Lifesciences has an average four-quarter positive earnings surprise of 8.3%.
Broadcom LimitedAVGO is a designer, developer and supplier of analog and digital semiconductor connectivity solutions. Broadcom has an average four-quarter positive earnings surprise of 7%.
Finisar Corp.FNSR is a provider of fiber optic subsystems and network test and monitoring systems. Finisar has an average four-quarter positive earnings surprise of 35.8%.
Aegean Marine Petroleum Network Inc.ANW is a marine fuel logistics company that physically supplies and markets refined marine fuel and lubricants. Aegean Marine has an average four-quarter positive earnings surprise of 12.2%.
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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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