Richard Herman Driehaus prepared an investment strategy using the buy high and sell higher principle. The success of this strategy finally helped Driehaus secure a place in Barron’s All-Century Team. This strategy is a key investment approach for individuals with an inclination to take higher risk. Using this particular investment strategy, investors can easily gain from momentum stocks.
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 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 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 7,860 stocks to only 26.
Here are five of the 26 stocks that passed the screen:
Six Flags Entertainment Corporation SIX is an operator of regional theme and water parks under the Six Flags brand name. It has a Momentum Score of A and an average four-quarter positive earnings surprise of 8.2%.
SodaStream International Ltd. SODA is a manufacturer of home beverage carbonation systems. It has a Momentum Score of A and an average four-quarter positive earnings surprise of 27.7%.
WellCare Health Plans, Inc. WCG is a provider of managed care services for government-sponsored health care programs. It has a Momentum Score of B and an average four-quarter positive earnings surprise of 51.7%.
The Chemours Company CC is a major chemical company. It has a Momentum Score of A and an average four-quarter positive earnings surprise of 11.9%.
LPL Financial Holdings Inc. LPLA is a provider of an integrated platform of brokerage and investment advisory services. It has a Momentum Score of A and an average four-quarter positive earnings surprise of 51%.
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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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Chemours Company (The) (CC) : Free Stock Analysis Report
LPL Financial Holdings Inc. (LPLA) : Free Stock Analysis Report
Six Flags Entertainment Corporation New (SIX) : Free Stock Analysis Report
WellCare Health Plans, Inc. (WCG) : Free Stock Analysis Report
SodaStream International Ltd. (SODA) : Free Stock Analysis Report
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