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4 Momentum Picks Screened on Driehaus Strategy

Nitish Marwah

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 on the strategy, returned 13.5% and 18.1% in the five and 10-year time frames, respectively. This compared favorably 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.

Screening Parameters

In addition to the 50-day moving average and relative strength, we have considered a few parameters for picking the best stocks. As companies with a strong history of beating estimates usually outperform the market, we have added this parameter 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 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 6,801 stocks to only nine.

Here are four of the nine stocks:

Cogent Communications Holdings, Inc. CCOI is a provider of high-speed Internet access, private network, and data center colocation space services. It has a Momentum Score of A. The trailing four-quarter positive earnings surprise is 15.9%, on average.

Murphy USA Inc. MUSA is engaged in marketing of retail motor fuel products and convenience merchandise. It has a Momentum Score of A and a trailing four-quarter positive earnings surprise of 16.6%, on average.

Vertex Pharmaceuticals Incorporated VRTX is engaged in developing and commercializing therapies for treating cystic fibrosis. It has a Momentum Score of A and a trailing four-quarter positive earnings surprise of 33.8%, on average.

B2Gold Corp. BTG is a gold producer with three operating mines in Mali, the Philippines, and Namibia. It has a Momentum Score of B and four-quarter positive earnings surprise of 23.8%, 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.

Click here to sign up for a free trial to the Research Wizard today.

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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Vertex Pharmaceuticals Incorporated (VRTX) : Free Stock Analysis Report
 
Murphy USA Inc. (MUSA) : Free Stock Analysis Report
 
Cogent Communications Holdings, Inc. (CCOI) : Free Stock Analysis Report
 
B2Gold Corp (BTG) : Free Stock Analysis Report
 
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