I have good news: 2013 was a great year for U.S. stocks!
Now, the bad news …
Much like Santa, Uncle Sam knows if you were a nice investor. He’s eager to bag his share of your gains.
These two facts will influence trading for the rest of December, and risk-tolerant investors can use them to reach for big gains in early 2014.
Calling it a Year
Wall Street professionals, with their portfolios already bulging with profits, have essentially called it quits for 2013. In between their holiday parties, winter vacations and bonus dreams, they’re starting to think about strategy for the New Year.
Barring unforeseen catastrophe, it looks like roughly 80% of the stocks on major U.S. exchanges will end this year in the black.
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Take a step back and think. Two trends will unfold in the remaining days of 2013:
- Investors with taxable accounts who realized substantial gains this year will try to offset the profits by selling some of their losing positions.
- Professional investment managers will dump their biggest losers before year-end so they won’t appear in their annual reports.
Both phenomena are already taking place as you read this. You can either watch them happen, or take a risk and try to capitalize on them.
Since the overwhelming majority of stocks are up smartly so far in 2013, I expect the remainder will keep falling until year-end.
When the calendar turns to 2014, the selling pressure will ease and many of those same stocks could enjoy major rebounds. This well-known Wall Street phenomenon is called the …
… JANUARY EFFECT!
The January effect is most intense after years like 2013, when market gains were broad and relatively steep.
To take a chance on riding the January rebounds, I suggest looking for stocks with these attributes:
- Market losses in calendar year 2013,
- Strong attributes like dividend and earnings growth, and
- Enough liquidity to minimize transaction costs.
This week, I asked my computer for a few milliseconds of its precious time to help me identify January effect candidates. It answered me with the table below.
The 10 stocks on this list share characteristics that make them ideally positioned to benefit from this seasonal trend.
- Liquidity with listings on major U.S. stock exchanges and market capitalization of at least $1 billion,
- Share price off 20% or more from their respective 52-week highs and down at least 15%,
- Profitability, as indicated by a positive P/E, current dividend yield and consensus five-year earnings growth estimates, and
- Diversification by size, sector and geography.
My computer neglected to tell me how interesting these stocks are on their own merits, in addition to being short-term January effect plays.
For example, the analysts tracking Randgold Resources (GOLD) give it a $97 consensus price target, more than 47% above the current quote.
In fact, expert analysts expect every stock on the list to move ahead on its underlying fundamentals, regardless of the January effect. Below are the consensus target prices for the stocks on the table and the percentage gains from their recent closing prices.
I think Brazilian mining giant Vale SA ADR (VALE) may perform even better than this. While the consensus analyst expectation for Vale’s five-year annual per-share earnings growth is only 0.2%, a pickup in Chinese industrial activity could push earnings growth well beyond that rate.
Keep in mind that the analyst targets are the result of traditional stock analysis. The January effect could amplify the gains, although buyers would likely need to look beyond the short term.
Start Warming up to the January Effect
To exploit the January effect—assuming it happens—investors should track these candidates closely and make sure the selling pressure persists until late in the year.
You should also follow company news to make sure the pricing weakness is not a sign of other problems that could dampen investor enthusiasm.
My experience is that January rebounds usually begin right at the start of the New Year. So toward the end of December, you’ll want to monitor price movements and determine a buying point. I suggest looking for lulls in activity near the Christmas and New Year’s holidays.
Picking the right time to buy is as much an art as a science. You don’t want to be caught in the year-end tax selling and portfolio cleansing … but you also don’t want to miss a profit opportunity. As always, successful investing takes study and some hard work!
I also suggest limiting exposure to any one industry. Metals stocks were hammered this year and investors may bid them a not-so-fond farewell over the next couple of weeks to reduce their tax liabilities.
To be on the safe side, I wouldn’t suggest holding more than one stock from the metals and mining industry as a possible January effect play.
Most of all, remember that the January effect’s potential quick profits are riskier than long-term, fundamentally driven investing. For less risky, more stable investments, check out my Global Trend Trader service.
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