For investors seeking to maximize returns, high-momentum stocks merit close attention. To identify stocks with strong upside potential, investors can adopt Richard Driehaus’s “buy high and sell higher” strategy, a philosophy he famously championed and that earned him a place on Barron’s All-Century Team.
Applying the Driehaus momentum-investing strategy, Alphabet Inc. GOOGL, MasTec, Inc. MTZ and The Goldman Sachs Group, Inc. GS have emerged as the top momentum picks, offering attractive entry opportunities for investors now.
How the Driehaus Momentum Strategy Uncovers Winning Stocks
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 one of the key criteria when creating a portfolio aligned 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 prioritized in this strategy, which was designed to deliver better long-term returns.
Research Wizard Stock Selection Criteria
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
Whether the market is good or bad, stocks with a Zacks Rank #1 have a proven track record 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 13.
Here are three of the 13 stocks:
Alphabet
Alphabet operates Google Services, Google Cloud and Other Bets, serving customers worldwide. It has a Momentum Score of A. The trailing four-quarter earnings surprise for GOOGL is 86.7%, on average. The company’s expected earnings growth rate for the current year is 32.7%.
MasTec
MasTec provides engineering, construction and maintenance services for communications, energy and utility infrastructure across the United States and Canada. It has a Momentum Score of A. The trailing four-quarter earnings surprise for MTZ is 15.4%, on average. The company’s expected earnings growth rate for the current year is 46.3%.
Goldman Sachs
Goldman Sachs provides a broad range of financial services to corporations, institutions, governments and individuals worldwide. It has a Momentum Score of A. The trailing four-quarter earnings surprise for GS is 20.4%, on average. The company’s expected earnings growth rate for the current year is 34.1%.
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The Goldman Sachs Group, Inc. (GS): Free Stock Analysis Report
MasTec, Inc. (MTZ): Free Stock Analysis Report
Alphabet Inc. (GOOGL): Free Stock Analysis Report
This article originally published on Zacks Investment Research (zacks.com).