Fundamental analysisGuru functionsGuru StrategiesScreeners

Driehaus Screen (Momentum Trading-Using Excel)

Written by Vanshika Kothari
Mon Mar 22 2021
See how MarketXLS helps you take advantage in the markets.
Download Option Templates →
 

Investors with high-risk appetite focus mainly on robust returns by investing in momentum stocks. Momentum investors seek rapidly growing companies, hoping that the continued growth will grab additional investors’ attention, which will further drive the stock price high. Richard Driehaus is one such prominent investor who developed a momentum strategy on the “buy high and sell higher” principle. He believes that earnings growth is the primary driver of stock prices, as sustained earnings growth allows a company to increase cash flows and dividends.

What are momentum stocks?

Momentum is the speed of price changes in stock. It shows the rate of change in price movement over a period of time to help investors determine a trend’s strength. Stocks that tend to move with the strength of these price changes (momentum) are called momentum stocks. Investors usually go long (buy shares) on momentum stocks in an uptrend and short (sell shares) in a downtrend.

Driehaus Screener using MarketXLS Template

Driehaus Screen template

Driehaus Screen helps identify momentum stocks and those companies with improving earnings growth rates and then identify which of them are most likely to continue the trend. It screens for firms that are beating analyst expectations and producing positive earnings surprises.

He focuses on small-cap firms with a market cap of less than $ 500 million and mid-caps with market caps up to $3 billion. It is much easier for a smaller company to post-sales growth of 20% and above than a big company such as Walmart (NYSE: WMT), with annual sales of more than $ 500 billion that have been averaging top-line growth of 1.3% over the last 5 years.

The 26-week relative strength index of the stock greater than the industry (i.e. 50) tips off that the gains are more significant than the losses, and EPS growth ensures improving business. The average daily volume for the last 10 days has to be in the top 50% of all stocks as greater volume indicates the investors’ greater interest.

Besides the quantitative data, the screen also excludes the stocks that trade as American Depository Receipts (ADRs). It checks whether the company has beaten at least three analysts’ estimates for its earnings in the current quarter.

How well does it work?

Driehaus insisted that simply applying momentum as a technical analyst or trader will never be able to sustain. The investor will have to keep faith even if the portfolio value falls significantly. Overall, this approach has outperformed the market several times in the last 20 years. It had generated compound annual returns of 30% during the 12 years after it started in 1980. An interpretation of Driehaus’s methods, produced by AAII, has returned 19.2% and 14.6% over five and ten years, respectively. By comparison, the S&P 500 returned just 4.7% and 3.5% over the same periods. 

Factors to look out for

Since the volatility is high for momentum investing, the strategy has a few downsides. The investor may be at risk of timing a buy incorrectly and ending up underwater. As Richard Driehaus rightly said, a stock’s price is rarely the same as its value as the valuations are usually flawed. The price of stocks is highly affected by market sentiments and investors’ dynamics.

As previously seen in 2009, these strategies can crash in extreme market conditions, causing significant losses to the trader. High stock turnover can also be expensive in terms of fees which can be a major concern for most traders.  Additionally, it may also need a lot of work and can be time-intensive.

The Bottom Line

This strategy may lead to impressive returns if handled well. The critical aspect is to capitalize on the market volatility right and invest at the correct timings. Over time, the profit potential increase using momentum investing can be staggeringly large. However, it may not be suitable for everyone considering the high-risk factor. For an individual investor, practicing momentum investing will most likely lead to overall portfolio losses. Usually, when the individual investor might be purchasing a rising stock or selling a falling stock, it will most likely be of older news and lag behind the professionals leading to significant losses.

Buying high and selling higher is momentum traders’ desirable goal, but this goal does not come without its fair share of challenges.

Disclaimer

None of the content published on marketxls.com constitutes a recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. The author is not offering any professional advice of any kind. The reader should consult a professional financial advisor to determine their suitability for any strategies discussed herein. The article is written for helping users collect the required information from various sources deemed to be an authority in their content. The trademarks if any are the property of their owners and no representations are made.

References

Momentum Indicates Stock Price Strength. https://www.investopedia.com/articles/technical/081501.asp

Richard Driehaus screen: A momentum strategy focused on earnings growth  https://news.yahoo.com/news/richard-driehaus-screen-momentum-strategy-203206758.html

Driehaus Screen https://www.aaii.com/stock-investor-pro/screens/86

Read About Richard here.
https://www.wsj.com/articles/richard-driehaus-stock-market-daredevil-preserved-traditional-architecture-11616673753?st=ldtef1y9g4qze2i&reflink=article_imessage_share

Interested in building, analyzing and managing Portfolios in Excel?
Download our Free Portfolio Template
Download Option Templates

Top 100 Gainers Today

Top 100 losers Today

Real gdpReal personal consumption expReal private investmentReal govt expenditureReal net exportsReal exportsReal importsFederal receiptsFederal outlaysFederal surplus or deficitFederal debtReal private investment nonresidentialReal private investment residentialReal potential gdpReal personal incomeReal personal consumption exp monthlyRpce durable goodsRpce nondurable goodsRpce servicesPersonal savings rateMonetary baseCurrency in circulationBank reservesMoney supply m1Money supply m2Sp500DjiaWilshire indexVixFinancial stress indexCorporate bond index aaCorporate bond index bbbFederal funds rateTreasury rate 3mTreasury rate 1yTreasury rate 5yTreasury rate 10yTips 5yTips 10yBond yield aaaBond yield baaMortgage rate 15yMortgage rate 30yUs dollar weighted averageUsdollar to euroUsdollar to poundYuan to usdollarCanadiandollar to usdollarYen to usdollarCpiCpi wo food energyCpi foodCpi energyChain price indexChain price index wo food energyGdp price deflatorPpi final demandPpi finished goodsPpi materialPpi crude goodsPpi final demand wo food energyPpi finished goods wo food energyHouse price indexHouse price index 20cityCrude oil priceGasoline priceNatural gas priceIndustrial productionCapacity utilisationInventoriesSales retail foodVehicle sales light weightManufacture orders durablesManufacture orders capital goodsLoansConsumer credit outstandingCorporate profitsHousing startsBuilding permitsResidential constructionEmployees nonfarmEmployees privateEmployees goods producingEmployees service providingEmployees governmentUnemployment rateInitial cliamsAverage weeks unemployedJob openingsHiresSeparationsQuitsLayoffs dischargesHours of productionHourly earningsReal outputPopulationLabor forceLabor force participation rate
Search for a stock

Top MarketXLS Rank stocks

Rush Enterprises Inc. Class B Common Stock logo

Rush Enterprises Inc. Class B Common Stock

51.55
 
USD
 
1.94
 
(3.91%)
81
Rank
Optionable: No
Market Cap: 2,753 M
Industry: Auto & Truck Dealerships
52 week range    
35.64   
   57.55
Booz Allen Hamilton Holding Corporation logo

Booz Allen Hamilton Holding Corporation

92.84
 
USD
 
2.48
 
(2.74%)
81
Rank
Optionable: Yes
Market Cap: 11,592 M
Industry: Business Services
52 week range    
69.32   
   93.45
BWX Technologies Inc. logo

BWX Technologies Inc.

56.44
 
USD
 
1.35
 
(2.45%)
80
Rank
Optionable: Yes
Market Cap: 4,846 M
Industry: Aerospace & Defense
52 week range    
42.22   
   61.75
Ritchie Bros. Auctioneers Incorporated logo

Ritchie Bros. Auctioneers Incorporated

67.49
 
USD
 
2.43
 
(3.74%)
77
Rank
Optionable: Yes
Market Cap: 6,928 M
Industry: Business Services
52 week range    
48.44   
   75.28
Ituran Location and Control Ltd. logo

Ituran Location and Control Ltd.

24.33
 
USD
 
-0.16
 
(-0.65%)
77
Rank
Optionable: Yes
Market Cap: 504 M
Industry: Communication Equipment
52 week range    
19.49   
   29.33
General Mills Inc. logo

General Mills Inc.

75.79
 
USD
 
0.34
 
(0.45%)
76
Rank
Optionable: Yes
Market Cap: 42,311 M
Industry: Packaged Foods
52 week range    
55.38   
   75.96
CRA InternationalInc. logo

CRA InternationalInc.

89.15
 
USD
 
-0.17
 
(-0.19%)
76
Rank
Optionable: Yes
Market Cap: 646 M
Industry: Business Services
52 week range    
78.05   
   115.47
ConAgra Brands Inc. logo

ConAgra Brands Inc.

34.56
 
USD
 
0.32
 
(0.93%)
76
Rank
Optionable: Yes
Market Cap: 16,287 M
Industry: Packaged Foods
52 week range    
29.80   
   36.67
Agree Realty Corporation logo

Agree Realty Corporation

73.53
 
USD
 
1.40
 
(1.94%)
76
Rank
Optionable: Yes
Market Cap: 5,522 M
Industry: REIT - Retail
52 week range    
60.78   
   74.67
UNITIL Corporation logo

UNITIL Corporation

61.00
 
USD
 
2.28
 
(3.88%)
75
Rank
Optionable: Yes
Market Cap: 928 M
Industry: Utilities - Diversified
52 week range    
39.90   
   61.08

More Features

Stand with Ukraine

As the situation in Ukraine escalates, many of us in MarketXLS are left with emotions too overwhelming to name. If you’d like to show your support, but aren’t sure how to, we want to help make it easier for you to act.

For any amount donated, we’ll extend your MarketXLS subscription for double of the donated amount. Please send proof of your payment to support@marketxls.com to avail the extention

From all of us at MarketXLS, thank you!