The Driehaus strategy essentially uses the “buy high and sell higher" principle to select the best stocks that have the potential substantially outperform the market. The success of this investment approach eventually helped Richard Herman Driehaus get 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-than-market returns. AAII’s portfolio, which was developed based on the Driehaus strategy, returned 324.3% since the end of the last bear market compared with 85.5% gains registered by the S&P 500.
A Detailed Look Into 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 change in 50-day moving average as one of the key criteria for creating a portfolio based on Driehaus’ philosophy.
It is calculated by dividing a stock’s 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 change in 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 strategy primarily focuses on strong earnings growth rates and impressive earnings projections for picking 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.
In addition to the 50-day moving average and relative strength, we have considered a few some parameters for picking the best stocks. As companies with a strong history of beating estimates usually outperform the market, we added this to our screen. Also, 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
No matter whether good market or bad, stocks with a Zacks Rank #1 (Strong Buy) 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
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 7,097 stocks to only 15.
Here are five of the 15 stocks:
Boot Barn Holdings, Inc. BOOT is lifestyle retailer of western and work-related footwear, apparel and accessories for men, women as well as children. It has a Momentum Score of A and an average four-quarter positive earnings surprise of 26.1%.
Kirkland Lake Gold Ltd. KL is a gold producer operating in Canada and Australia. It has a Momentum Score of A and an average four-quarter positive earnings surprise of 6.1%.
Ally Financial Inc. ALLY is the owner and operator of a digital financial-services company. It has a Momentum Score of B and an average four-quarter positive earnings surprise of 9.4%.
Alibaba Group Holding Limited BABA is a provider of core commerce, cloud computing, digital media and entertainment in China as well as globally. It has a Momentum Score of B and an average four-quarter positive earnings surprise of 17.8%.
Zumiez Inc. ZUMZ is a specialty retailer of apparel, footwear, accessories and hardgoods for men as well as women. It has a Momentum Score of A and an average four-quarter positive earnings surprise of 60.9%.
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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Alibaba Group Holding Limited (BABA) : Free Stock Analysis Report
Ally Financial Inc. (ALLY) : Free Stock Analysis Report
Zumiez Inc. (ZUMZ) : Free Stock Analysis Report
Boot Barn Holdings, Inc. (BOOT) : Free Stock Analysis Report
Kirkland Lake Gold Ltd. (KL) : Free Stock Analysis Report
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