Seeking Alpha
Research analyst, newsletter provider, portfolio strategy
Profile| Send Message|
( followers)  

In a previous article (click here), I have shown on 13-year statistics that the December seasonal pattern could be split in two separate moves: Santa Claus Rally before Christmas, and Window Dressing the last three days of the year.

Going further in the details, here are the 13-year average total returns of stocks during the Window Dressing Rally by sector and capital size (S&P 500 and Russell 2000). Sectors are ranked according to the big caps average return.

Window Dressing (13-year average in %)

SP500 R2000
Information Technology 2.15 1.84
Telecommunication Services 1.72 1.94
Materials 1.15 1.82
Financials 1.04 0.82
Consumer Discretionary 1 1.2
Energy 0.9 1.72
Industrials 0.81 1.07
Health Care 0.27 0.91
Utilities 0.28 0.4
Consumer Staples 0.02 0.62

It is not a surprise that fund managers are loading tech stocks to make their end-of-year snapshot look better. Information technology is the "Schumpeterian sector" for about 20 years and has driven the economy for a long time.

The previous article has shown that the Window Dressing was stronger in big caps among the tech stocks. Here is a zoom on the IT sector big caps (S&P 500) classified by industries, and their average total return for 13 years in Window Dressing:

Window Dressing
(13-year average in %)
SP500
Internet Software & Services 3.05
Communications Equipment 2.87
Computers & Peripherals 2.28
Electronic Equipment 1.59
Office Electronics 1.53
Software 1.36
Semiconductors 1.15
IT Services 0.95

Internet and communication equipments are clearly the leaders, in spite of the dot-com crash in 2000-2002, which is included in the period. The S&P 500 members of these two industries are only twelve. Here are their total returns and standard deviation year-to-date (12/6/2012 on close):

Company Ticker Total Return YTD % Standard Deviation %
Internet Software & Services
Akamai Technologies Inc AKAM 18.47 48.44
eBay Inc. EBAY 68.64 35.82
Google Inc GOOG 5.85 27.92
Verisign Inc VRSN 0.44 45.02
Yahoo Inc YHOO 18.01 24.82
Communications Equipment
Cisco Systems Inc CSCO 7.48 29.7
F5 Networks Inc FFIV -14.71 49.26
Harris Corp HRS 34.87 24.89
JDS Uniphase Corp JDSU 14.58 43.22
Juniper Networks Inc JNPR -8.61 50.92
Motorola Solutions Inc MSI 18.42 24.31
QUALCOMM Inc. QCOM 16.71 29.24

(Please note that this list is the current one. It was not the same since 1999. There is no survivor bias or look-ahead bias here)

Now a question: if you were a fund manager, which stocks would you pick among these ones to show as current holdings in your annual report?

Knowing that customers like high returns and low volatility, here would be my choice:

1st- eBay, the highest return and a standard deviation about half of it.

2nd- Harris, whose return is more than respectable and above its standard deviation.

3rd and 4th- Yahoo and Motorola are also good-looking candidates, with returns above the benchmark and a reasonable volatility.

5th- I'm wary of Qualcomm. It is also in an acceptable range of return and volatility, but the chart was bumpier. Moreover, it is among the nine companies that might be hit in a near future by the clash between China and the USA about accounting reports.

The other stocks didn't perform so well or were too volatile in my opinion.

Let's have a quick glance at the two winners (courtesy finviz.com)

EBAY


(Click to enlarge)

The price is in a short-term consolidation. Like the price, the volume is on a short-term downtrend. EBAY seems to draw a pennant with a long flagpole, which is a high-probability continuation pattern (in this case bullish). It is less than 3% below its 52-week high. With a robust ROE (21%) and a reasonable debt, EBAY looks not only a good play on the short term, but also attractive for long-term investors.

HRS


(Click to enlarge)

After a quick drop in October and a triple bottom, HRS is in a steady recovery trend since mid-November. Harris has also a high ROE (27%) but a debt/equity ratio above 1 makes the stock less attractive for long-term investors in these uncertain times.

Conclusion:

Traders interested in a short term play between Christmas and New Year's Day may have a close look at these stocks. This article is focused on a strong end-of-year bias and a top-down approach, not on individual stock analysis.

Source: These Stocks Are The Best Candidates For A Window Dressing Rally