Risk friendly investors often look for strategies that will help generate solid returns from momentum stocks. One such strategy was formulated by Richard Driehaus, which is based on the "buy high and sell higher" principle. The popularity of the strategy earned Driehaus a mention in Barron’s All-Century Team.
Portfolios such as that of 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 the five- and 10- year timeframe, respectively, compared with -1.1% and 4.2% gains for the S&P 500. Thus, investors with a high risk appetite may opt for this strategy.
A Look at Driehaus’ Strategy
After a detailed study of Driehaus’ strategy, AAII concluded that it mainly focuses on strong earnings growth rates and impressive prospects to pick potential outperformers. While this strategy was made to provide better returns over the longer haul, companies with a strong history of beating estimates were also given importance.
“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,” Driehaus had said in an interview.
Screening Parameters
The percentage 50-day moving average is one of the key criteria 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. 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.
In order to make the strategy more profitable, we have only considered those stocks that have a Zacks Rank #1 (Strong Buy) as well as 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 7,901 stocks to only 22.
Here are five of the 22 stocks:
Marcus Corp MCS operates in the lodging and entertainment sectors. The company has a Momentum Score of ‘A’ and an average four-quarter positive earnings surprise of 15.4%.
Synovus Financial Corp. SNV is a bank holding and financial services company. The company has a Momentum Score of ‘B’ and an average four-quarter positive earnings surprise of 5.5%.
DST Systems, Inc. DST provides technology-based information processing and servicing solutions. The company has a Momentum Score of ‘A’ and an average four-quarter positive earnings surprise of 10.3%.
Flushing Financial Corporation FFIC is a bank holding company. The company has a Momentum Score of ‘B’ and an average four-quarter positive earnings surprise of 6.4%.
Texas Instruments Incorporated TXN is a global semiconductor company. The company has a Momentum Score of ‘A’ and an average four-quarter positive earnings surprise of 7.7%.
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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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