Gain From These Momentum Stocks Using Driehaus Strategy

Driehaus strategy is generally used by risk-taking investors who bet on momentum stocks for stupendous returns. Richard Driehaus, the pioneer of momentum investing, developed a "buy high and sell higher" strategy. The success of this strategy earned Driehaus 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 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 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.

Screening Parameters

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 7,870 stocks to only 12.

Here are five of the 12 stocks that passed the screen:

Belden Inc. (NYSE:BDC) is a designer and marketer of signal transmission solutions globally.The company has a Momentum Score of ‘A’ and an average four-quarter positive earnings surprise of 7.2%.

KEMET Corporation (NYSE:KEM) is a manufacturer and seller of passive electronic components.The company has a Momentum Score of ‘A’ and an average four-quarter positive earnings surprise of 72.9%.

SYNNEX Corporation (NYSE:SNX) is a provider of business process services to resellers, system integrators, retailers and original equipment manufacturers.The company has a Momentum Score of ‘B’ and an average four-quarter positive earnings surprise of 14.8%.

Applied Optoelectronics, Inc. (NASDAQ:AAOI) is a designer, manufacturer and seller of fiber-optic networking products.The company has a Momentum Score of ‘A’ and an average four-quarter positive earnings surprise of more than 100%.

American Airlines Group Inc. (NASDAQ:AAL) is a network air carrier operator.The company has a Momentum Score of ‘B’ and an average four-quarter positive earnings surprise of 20.2%.

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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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