Think Like Driehaus And Invest In These Stocks

"Buy high and sell higher" is the basic principle of most momentum strategies. Investors with a high risk appetite seek to invest in potential stocks following this strategy in order to derive explosive returns. However, finding a potential momentum strategy is not always so easy. For those who are lacking enough clues of how to invest in potential momentum stocks, Richard Driehaus’ – a pioneer of momentum investing – strategy is the way to go. This strategy made Driehaus famous and his name features prominently in the list of the top investment gurus throughout the globe.

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 #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 7,700 stocks to only 14.

Here are five of the 14 stocks:

Movado Group, Inc. (NYSE:MOV) is a designer, manufacturer and distributor of quality watches. Movado Group has a Momentum Score of ‘A’ and an average four-quarter positive earnings surprise of 10.5%.

Align Technology, Inc. (NASDAQ:ALGN) designs, manufactures and markets the Invisalign System, a proprietary method for treating malocclusion. Align Technology has a Momentum Score of ‘A’ and an average four-quarter positive earnings surprise of 23%.

Arch Capital Group Ltd. (NASDAQ:ACGL) is a diversified financial services holding company, with an emphasis on the insurance sector. Arch Capital Group has a Momentum Score of ‘A’ and an average four-quarter positive earnings surprise of 9.3%.

Gibraltar Industries, Inc. (NASDAQ:ROCK) is a leading manufacturer, processor, and distributor of metals and other engineered materials for the building products, vehicular, and other industrial markets. Gibraltar Industries has a Momentum Score of ‘B’ and an average four-quarter positive earnings surprise of 67.3%.

Rogers Corporation (NYSE:ROG) manufactures and sells specialty polymer composite materials and components. Rogers has a Momentum Score of ‘B’ and an average four-quarter positive earnings surprise of 37.2%.

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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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