Many small cap companies have been swept along by a wave of optimism over the past year. But that’s left some of them at risk of sharp sell-offs on disappointing results news. In March alone we saw stocks like Smiths News and Majestic Wine hammered for damping down expectations and undershooting earnings forecasts. By comparison, some of those that have kept up positive earnings and price momentum have been richly rewarded. Nowhere is that more evident than in the results of our Richard Driehaus strategy. With a 1-year return of 57% it offers some useful pointers for finding potentially great growth stocks on the move.

Driehaus’s focus on earnings and price momentum in small caps makes for an ideal fit with the current bullish conditions. Rather than agonising over value opportunities in growth shares, it sets itself apart by looking for positive earnings surprises. In other words, it isn’t simply looking for stocks that are meeting earnings expectations - it’s looking for those that are beating them. By combining earnings momentum with recent price strength, it’s a strategy that hunts down stocks that are already catching the eye of other investors. You can read more about the strategy here.

The Driehaus portfolio was rebalanced in mid-March and has already seen from some decent price gains. They include Walker Greenbank, the interior furnishings company, which is up 11.6% and Staffline, the recruitment firm, which has risen by 7.9%. Even Dart, the airline and logistics company, has risen by 2.2%. That reflects the strategy’s confidence in buying strong growth companies that may have already risen in price to the point of scaring off other investors.

Finding growth stars on the move

Like many of Stockopedia’s guru-inspired strategies however, the Driehaus screen has recently seen a fall in the number of companies meeting its specific requirements. In this case, it’s perhaps because fewer companies have been able to pull the sorts of earnings surprises needed to beat analyst forecasts. Even so, there are still ways of finding growth stocks with strong momentum by taking a different approach, but without killing the ‘surprise’ element that has proved to be so effective for the Driehaus formula.

This fork of the Driehaus strategy shows how well the current crop of qualifiers…

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