Invest Like Driehaus In These 5 Momentum Stocks

Banking on the "buy high and sell higher" principle, Richard Driehaus – a strong advocator of momentum investing – came out with a successful investment strategy that made him popular in the 1980s and 1990s. Barron honored Driehaus by including his name in its All-Century Team. Risk loving investors favor the momentum strategy as it’s known to be a high yielding one like Driehaus’ strategy.

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% returns 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 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 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.

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 or less than #2
(Only Strong Buy and Buy rated stocks can get through.)

• 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 or 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 7,700 stocks to only 25.

Here are five of the 25 stocks:

American Woodmark Corp. (NASDAQ:AMWD) is involved in producing and selling of kitchen cabinets and vanities in the U.S. American Woodmark has a Zacks Rank #1 with a Momentum score of ‘A.’ AMWD has an average four-quarter positive earnings surprise of 33.1%.

Nordson Corporation (NASDAQ:NDSN) is one of the world's leading producers of precision dispensing equipment that applies adhesives, sealants and coatings. Nordson has a Zacks Rank #1 with a Momentum score of ‘A.’ NDSN has an average four-quarter positive earnings surprise of 9.1%.

Smith & Wesson Holding Corporation (NASDAQ:SWHC) is one of the world's leading producers of quality handguns, law enforcement products and firearm safety and security products. Smith & Wesson has a Zacks Rank #1 with a Momentum score of ‘A.’ SWHC has an average four-quarter positive earnings surprise of 34.1%.

NetEase, Inc. (NASDAQ:NTES) is an Internet technology company engaged in the development of applications, services and other technologies for the Internet in China. NetEase has a Zacks Rank #1 with a Momentum score of ‘B.’ NTES has an average four-quarter positive earnings surprise of 28.3%.

LendingTree, Inc. (NASDAQ:TREE) is the one of the leading online loan marketplaces in the country, empowering consumers as they comparison-shop across a full suite of loan and credit-based offerings. LendingTree has a Zacks Rank #2 with a Momentum score of ‘B.’ TREE has an average four-quarter positive earnings surprise of 86.4%.

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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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