Richard Herman Driehaus, renowned American businessman and fund manager, created an investment approach using the buy high and sell higher theory. This strategy is perfect for investors who have the propensity to take high levels of risk. Using this particular strategy, investors can buy momentum stocks. The eventual success of this investment strategy helped Driehaus earn 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. Its portfolio, which was developed following the strategy, returned 13.5% and 18.1% in the five and 10-year time frames, 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 keeping 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.
Our research shows that stocks with a Zacks Rank #1 (Strong Buy) or 2 (Buy) and a Momentum Score of A or B 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
(Ideal for taking advantage of momentum with the highest probability of success.)
These few parameters narrowed down the universe of over 6,554 stocks to only 10.
Here are five of the 10 stocks that passed the screen:
Insperity, Inc. NSP is a provider of human resources and business solutions. It has a Momentum Score of A and an average four-quarter positive earnings surprise of 18.4%.
One Liberty Properties, Inc. OLP is a self-administered and self-managed real estate investment trust. It has a Momentum Score of A and an average four-quarter positive earnings surprise of 3.7%.
Clearway Energy, Inc. CWEN is an operator of contracted renewable and conventional generation, and thermal infrastructure assets. It has a Momentum Score of A and an average four-quarter positive earnings surprise of more than 100%.
Northrim BanCorp, Inc. NRIM is the bank holding company for Northrim Bank. It has a Momentum Score of B and an average four-quarter positive earnings surprise of 16.3%.
United States Cellular Corporation USM is a provider of wireless telecommunications services in the United States. It has a Momentum Score of B and an average four-quarter positive earnings surprise of more than 100%.
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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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Northrim BanCorp Inc (NRIM) : Free Stock Analysis Report
United States Cellular Corporation (USM) : Free Stock Analysis Report
One Liberty Properties, Inc. (OLP) : Free Stock Analysis Report
Insperity, Inc. (NSP) : Free Stock Analysis Report
Clearway Energy, Inc. (CWEN) : Free Stock Analysis Report
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