Investors now aiming for exceptional returns should concentrate on high-momentum stocks. To uncover stocks with further upside potential, they can follow Richard Driehaus’s famous “buy high and sell higher” approach, which earned him a place on Barron’s All-Century Team.
By applying the Driehaus momentum-investing approach, Micron Technology, Inc. MU, Five Below, Inc. FIVE and Marathon Petroleum Corporation MPC have emerged as strong momentum plays and attractive entry points for investors.
Inside 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”) considered the 50-day moving average as one of the key criteria when creating a portfolio in line with 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 above its 50-day moving average, signaling an uptrend.
Moreover, 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 designed to provide better returns over the long term.
Research Wizard Screening Parameters
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, 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 an 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 the 50-day moving average and the relative strength signal uptrend
• Momentum Score equal to or less than B
A favorable momentum score indicates that it is ideal to capitalize on the momentum with the highest probability of success.
These few parameters have narrowed the universe of more than 7,743 stocks to only 15.
Here are three of the 15 stocks:
Micron Technology
Micron Technology is a provider of memory and storage products globally. It has a Momentum Score of A. The trailing four-quarter earnings surprise for MU is 21.7%, on average. The company’s expected earnings growth rate for the current year is 621.7% (read more: Micron vs. Marvell: Only One AI Semiconductor Stock Is a Buy This June).
Five Below
Five Below is a U.S.-based specialty discount retailer that offers a wide range of products at value-oriented price points. It has a Momentum Score of A. The trailing four-quarter earnings surprise for FIVE is 70.1%, on average. The company’s expected earnings growth rate for the current year is 30.4%.
Marathon Petroleum
Marathon Petroleum is a leading downstream energy company operating across the United States. It has a Momentum Score of B. The trailing four-quarter earnings surprise for MPC is 49.5%, on average. The company’s expected earnings growth rate for the current year is 180.8%.
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This article originally published on Zacks Investment Research (zacks.com).