At the end of every year, tax-loss selling and window dressing create candidates for the annual January Effect. The best candidates are trading near their lows for the year and have either cash flow or assets that are undervalued vs. comparable companies. This year, several companies with significant positions in either the Bakken or Eagle Ford meet the criteria of ideal January Effect stocks. Bakken/Eagle Ford stocks recommended for investors to consider as January Effect candidates are Northern Oil & Gas (NOG), Goodrich Petroleum (GDP), and Emerald Oil (EOX). Information on Northern and what makes a good January Effect stock can be found in Part I, information on Goodrich can be found in Part II, information on Emerald can be found in Part III, and information on Crimson Exploration (CXPO) can be found in Part IV.
Magnum Hunter Resources (MHR) is another Bakken and Eagle Ford stock poised to benefit from the January Effect. Magnum is currently trading at $3.82 per share and has traded as high as $7.71 and as low as $3.29 over the last 12 months. Magnum has an enterprise value of $1.31 billion. Magnum exited the third quarter of 2012 with 14,145 Boepd in production. Magnum Hunter owns the Eureka Hunter gas pipeline and other midstream assets, with a business model similar to the one employed by Chesapeake Energy (CHK). Like Chesapeake, Magnum has also built large acreage positions in some of the most lucrative shale basins in the U.S.
Magnum has 180,000 net acres in the Bakken and 26,000 net acres in the oil window of the Eagle Ford Shale, some of which is prospective for the Pearsall Shale. The company also has 85,500 net acres in the Marcellus and 81,800 net acres in the emerging Utica Shale in southeastern Ohio. Based on its production and acreage positions, Magnum Hunter remains very undervalued compared to companies like Kodiak Oil & Gas (KOG) or Cabot Oil & Gas (COG).
Investors looking for January Effect stocks should be aware that some reach a low in November and early December and then climb before January, as most of the sellers have already exited. Other January Effect stocks maintain selling pressure all the way into the last day of trading for the year. It would be wise to commit half of your capital to the play now and hold back the other half for a second round of buying if the selling pressure pushes the stock to new lows at the end of the year.
While Northern, Goodrich, Emerald, Crimson, and Magnum Hunter are very good buy-and-hold prospects, the objective of buying a January Effect stock is to look for short-term gains. Some January Effect stocks recover the most by the middle of January and some continue to recover into the middle of March. Investors should therefore consider selling half of their position in the middle of January and the rest of the position before the end of March.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.