3 Momentum Stocks to Buy Banking on the Driehaus Strategy
Investors with an appetite for high risk may apply Richard Herman Driehaus’ investing strategy for higher returns. Driehaus’ strategy focuses on the “buy high and sell higher” rule and tends to pick momentum stocks. No doubt, it’s a successful investment strategy that helped Richard Driehaus make a place in Barron’s All-Century Team.
To that end, stocks like MGP Ingredients MGPI, Titan Machinery TITN and DAQO New Energy DQ have been selected as the momentum picks for the day using the Driehaus strategy.
A Look at Driehaus’ Strategy
After a detailed study of the Driehaus’ strategy, American Association of Individual Investors (AAII) concluded that it mainly focuses on strong earnings growth rates and impressive prospects to pick potential outperformers. While this strategy was created 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
No matter whether the market is good or bad, stocks with a Zacks Rank #1 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
A 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 7,720 stocks to only 14.
Here are three of the 14 stocks:
MGP Ingredients produces and markets ingredients and distillery products to the packaged goods industry. MGP Ingredients has a Momentum Score of B. The trailing four-quarter earnings surprise for MGPI is 76.8%, on average.
Titan Machinery represents a diversified mix of agricultural, construction, and consumer products dealerships located in the upper Midwest. Titan Machinery has a Momentum Score of A. The trailing four-quarter earnings surprise for TITN is 59.5%, on average.
DAQO New Energy is engaged in the manufacture and sale of high-quality polysilicon to photovoltaic product manufacturers. DAQO New Energy has a Momentum Score of B. The trailing four-quarter earnings surprise for DQ is 10.8%, 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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Titan Machinery Inc. (TITN) : Free Stock Analysis Report
DAQO New Energy Corp. (DQ) : Free Stock Analysis Report
MGP Ingredients, Inc. (MGPI) : Free Stock Analysis Report
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