Pioneer of momentum investing, Richard Driehaus was known for developing a "buy high and sell higher" strategy. Following the success of the strategy, Driehaus earned a place in Barron's All-Century Team. Investors with a high risk appetite might think of using the Driehaus' Strategy to rake in healthy returns from momentum stocks.
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 thefive- and 10- year timeframe, 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 line 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 order to make the strategy more profitable, we have considered 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
(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
(Favorable momentum score indicates that it is ideal to take advantage of the momentum with the highest probability of success.)
These few parameters narrowed down the universe of over 7,893 stocks to only eight.
Here are five of the eight stocks that passed the screen:
Constellation Brands, Inc.STZ is a leading international producer and marketer of beer, wine and spirits.The company has a Momentum Score of 'A' and an average four-quarter positive earnings surprise of 7.7%.
Mercadolibre, Inc.MELI is the largest online trading platform in Latin America.The company has a Momentum Score of 'B' and an average four-quarter positive earnings surprise of 9.2%.
DXC Technology CompanyDXC offers information technology services and solutions. The company has a Momentum Score of 'A' and an average four-quarter positive earnings surprise of 16.6%.
Applied Optoelectronics, Inc.AAOI designs, develops and manufactures advanced optical devices. The company has a Momentum Score of 'A' and an average four-quarter positive earnings surprise of 116.5%.
Arista Networks, Inc.ANET is engaged in providing cloud networking solutions. The company has a Momentum Score of 'B' and an average four-quarter positive earnings surprise of 17.7%.
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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.