3 of the Best Momentum Stocks to Buy Using Driehaus Strategy

Investors with an appetite for high risk may apply the Richard Herman Driehaus’ investing strategy, which helped him to make a place in Barron’s All-Century Team. The investing strategy can be used to choose the best momentum stocks with the “buy high and sell higher" theory.

A Detailed Look Into the 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 decline and try to guess when it will turn around.” In line with this insight, the American Association of Individual Investors (AAII) took into account the percentage 50-day moving average as one of the key criteria before creating a portfolio following Driehaus’ philosophy.

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. 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.

Additionally, AAII found that Driehaus primarily focuses 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 order to make the strategy more profitable, we have considered only those stocks that have a Zacks Rank #1 (Strong 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 (Buy), 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 for taking advantage of the momentum with the highest probability of success.

These few parameters have narrowed down the universe of over 7,743 stocks to only 15.

Here are three of the 15 stocks:

Caleres CAL is a footwear retailer and wholesaler. Caleres has a Momentum Score of A. The trailing four-quarter earnings surprise for CAL is 62.9%, on average.

The Chef's Warehouse CHEF is a distributor of specialty food products in the United States. Chef's Warehouse has a Momentum Score of A. The trailing four-quarter earnings surprise is 372.3%, on average, for CHEF.

Ulta Beauty ULTA is a leading beauty retailer in the United States. Founded in 1990, the company changed its name to Ulta Beauty in January 2017. Ulta Beauty has a Momentum Score of B. The trailing four-quarter earnings surprise for ULTA is 49.8%, 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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Ulta Beauty Inc. (ULTA) : Free Stock Analysis Report
 
The Chefs' Warehouse, Inc. (CHEF) : Free Stock Analysis Report
 
Caleres, Inc. (CAL) : Free Stock Analysis Report
 
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