3 Momentum Stocks Backed by Driehaus Strategy to Buy Now

Investing

Published: July 31, 2023 10:38 pm

To pick the best momentum stocks, the Driehaus strategy can be used. It is known as the “buy high and sell higher” theory. No doubt, it’s a successful investment strategy that helped Richard Driehaus make a place in Barron’s All-Century Team.

To that end, stocks like MI Homes MHO, Federal Signal FSS and ServiceNow NOW have been selected as the momentum picks for the day using the Driehaus strategy.

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) considered 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.

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 made to provide better returns over the long term.

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 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 16.

Here are three of the 16 stocks:

MI Homes is one of the nation’s leading builders of single-family homes. MI Homes has a Momentum Score of A. The trailing four-quarter earnings surprise for MHO is 40.4%, on average.

Federal Signal is a leader in environmental and safety solutions. Federal Signal has a Momentum Score of A. The trailing four-quarter earnings surprise for FSS is 5.8%, on average.

ServiceNow provides cloud computing services that automate digital workflows to accelerate enterprise IT operations. ServiceNow has a Momentum Score of A. The trailing four-quarter earnings surprise for NOW is 12.8%, on average.

Federal Signal Corporation (FSS): Free Stock Analysis Report

ServiceNow, Inc. (NOW): Free Stock Analysis Report

M/I Homes, Inc. (MHO): Free Stock Analysis Report

To read this article on Zacks.com click here.

Zacks Investment Research

This article originally appeared on Zacks