Investors who have a tendency to take high level of risks can choose momentum stocks as an investment option. Driehaus strategy uses the “buy high and sell higher" principle to select the best momentum stocks. The success of this particular investment approach eventually helped Richard Herman Driehaus get 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. AAII’s portfolio, which was developed following the strategy, returned 13.5% and 18.1% in five- and 10-year time frames, respectively, compared with 1.1% decline and 4.2% increase registered by the S&P 500. Thus, investors with a high-risk appetite may opt for this strategy to boost their portfolio returns.
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 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 added this parameter to our screen. Also, 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 good market or bad, stocks with a Zacks Rank #1 (Strong Buy) 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
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 6,818 stocks to only nine.
Here are four of the nine stocks:
Anixter International Inc. AXE is a distributor of enterprise cabling and security solutions, electrical and electronic wire and cable solutions, and utility power solutions. It has a Momentum Score of A and trailing four-quarter positive earnings surprise of 23.8%, on average.
Cincinnati Financial Corporation CINF is a provider of property casualty insurance products. It has a Momentum Score of B and trailing four-quarter positive earnings surprise of 17.9%, on average.
Cimpress plc CMPR is an investor in and builder of customer-focused, entrepreneurial, mass-customization businesses. It has a Momentum Score of A and last four-quarter positive earnings surprise of 41.4%, on average.
Federated Hermes, Inc. FHI is an asset management holding company. It has a Momentum Score of A and trailing four-quarter positive earnings surprise of 5.3%, 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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