Low-priced stocks can make big moves, especially if a rock-hard bottom has been reached in the share price. Investing in these types of stocks can add plenty of risk and reward to a portfolio, so it makes sense to sort through the stocks that might have limited downside due to undervaluation and yet have strong upside and even short-squeeze potential. Small-cap and low-priced stocks often see sharp upside moves in what is called a "January Effect" rally.
At the start of the year, investors tend to look for undervalued stocks and new money comes into the market as individual investors make retirement account contributions. Fund managers also look to increase risk and upside exposure at the beginning of the year because they have often reduced risk and stock exposure at the end of December in order to maintain end of the year performance numbers and bonuses for themselves. At the start of another year, they know that the only way to make a bonus and strong returns is to buy stocks that could move big and that often keeps their focus on undervalued small-cap stocks.
The other big factor is that once investors are finished selling stocks for tax-loss purposes, the shorts no longer have as much supply of shares (from tax-loss selling) to cover their positions and that can cause the stock to rise significantly in January. As we get into the holiday season, trading volumes decline and that makes it even tougher for shorts to cover without sending the stock price higher. This can result in a major short squeeze rally that can peak in the first several days of January since that marks the end of tax-loss selling completely. With this in mind, here are a few undervalued small-cap stocks that could also be primed for a "January Effect" and short-squeeze rally as we head into the early part of 2013:
Heckmann Corporation (HEK) is an environmental services company that focuses on the oil and gas sector. It has two divisions: One is Heckmann Water Resources, which transports, treats and disposes of water generated by energy companies during the discovery and production of oil and natural gas. The other division, Heckmann Environmental Service collects and recycles oil and related products. Heckmann operates in 52 locations across the United States and it has around 1,500 employees.
One factor that makes this stock very noteworthy is the management team. It is rare to find top executives who are serial money makers for themselves and shareholders. The CEO of this company, Richard J. Heckmann, has done exactly that. Mr. Heckmann founded United States Filter Corporation in 1990 and was its Chief Executive Officer. Under his watch this company grew from annualized revenue of approximately $17 million in 1990, to over $5 billion in 1999, when it was acquired by Vivendi S.A. of Paris, France in March 1999 for approximately $8.2 billion. After the sale of United States Filter Corporation, Mr. Heckmann served as Chief Executive Officer and Chairman of the Board of Directors of K2 Inc., (a maker of sporting goods). K2 sales surged under his leadership and the company was acquired by Jarden Corporation on August 8, 2007. With this kind of track record, it could be a very smart move to invest along with Mr. Heckmann.
Analysts see major revenue growth for Heckmann (just as with his other companies), and revenue is expected to jump from about $334 million to around $781 million. Analyst also expect it to turn a profit in 2013, with earnings estimates at 22 cents per share. In a Lighting Round session on CNBC's Mad Money, and on other episodes, Jim Cramer has made positive remarks on Heckmann shares. When discussing Heckmann a few weeks ago he said it: "Is turning into a world class amelioration of pollution company for fracking and drilling. That said, it has had a monster move from $3 to $5. You have to let it cool off. However, it is a spec stock I like and I want to buy it." Now that it has cooled off to below $4 recently it could be a great buying opportunity.
According to Shortsqueeze.com, nearly 45 million Heckmann shares are short. Based on average trading volume of about 3.4 million shares, it would take about 12 days worth of volume for shorts to cover. It seems that shorts are betting against management and hoping that the company will post losses, but "shorting" companies led by Mr. Heckmann has not paid off in the past.
Abraxas Petroleum Corp., (AXAS) shares are trading at just about half of the 52-week high, or around $2, and that appears to be a real bargain for a number of reasons. First of all, it has high-potential because of projects it has in the Rocky Mountains, Mid-Continent, Permian Basin and Texas Gulf Coast Basin. The Eagle Ford Shale and Bakken Range projects are poised to provide growth and upside potential since these regions are rich in resources. The Bakken Range is one of the richest oil plays in the world and experts have estimated it to hold around 24 billion recoverable barrels of oil. This has led to oil giants like Exxon Mobil (XOM) to go in and buy assets that would give it exposure to the Bakken Range. In 2012, Exxon agreed to buy Denbury Resource's (DNR) Bakken Range assets for about $1.6 billion.
Abraxas shares appear to be extremely undervalued, so much so that a major shareholder now appears to be taking the initial steps as an "activist" investor. The "Clinton Group, Inc." recently sent a letter to management requesting that non-core assets be divested, and that the company focus on increasing production. A recent press release says that the Clinton Group will follow up if actions are not taken and it highlights the undervaluation of this stock by saying: "The Clinton Group's sum-of-the-parts and cash flow valuation analyses concludes that fair value is approximately $4.35 per share." With the shares trading at about half that level now, and with what appears to be an activist investor on the scene, this stock might have limited downside and major upside potential. The Clinton Group goes onto say "By our math, outright sales of non-core acreage should yield the Company nearly $160 million, in addition to the $22 million in proceeds that are expected from the Nordheim and Alberta Basin deals already announced." Considering that the current market capitalization for Abraxas is about $170 million, and that these non-core asset sales could total about $182 million, it looks like shareholders selling at current levels are giving away the company's core assets, essentially for free.
The heavy short interest in this stock could fuel a short squeeze especially if Abraxas responds to the recent requests by the Clinton Group. Shorts could also have little time left to benefit from seasonal tax-loss selling. With this stock trading near 52-week lows, it is likely seeing tax-loss selling pressure now. As that supply of cheap shares fades as we get closer to December 31, the stock could be poised for a major rebound soon.
According to Shortsqueeze.com, there are nearly 10.4 million Abraxas shares short. Based on recent trading volume of around 600,000 shares per day, it could take about 15 days worth of volume for shorts to cover. Shorts seem focused on the hopes that profits at Abraxas will continue to be impacted by the investments this company has been making over the past few quarters, however, those investments appear poised to start paying off soon. With increased production growth projected in 2013, the end of tax-loss selling on December 31, asset sales and an activist investor involved, this stock appears poised for a short-squeeze.
MEMC Electronic Materials, Inc. (WFR) is a leading manufacturer of silicon wafers, which are used in a variety of products including semiconductors, solar panels and other applications. The stock has been hit hard by tough industry dynamics in the solar sector. Many European countries had generous subsidy programs for solar energy, but the debt crisis and government spending cutbacks have forced program changes. That has led to an inventory glut and lower prices. Because of this, profit margins are not what they used to be and many companies in this industry have recently posted losses. However, there are some more hopeful signs developing and since MEMC is an American company, it could benefit from recent tariffs that have been imposed on Chinese solar companies that range from 24% to 36%.
Also, it seems that insiders feel the stock is undervalued and may hold hope for a turnaround. On November 14, and 15, 2012, Steven Tesoriere purchased over 3.2 million shares in a transaction worth more than $7 million. Analysts are expecting the company to report a profit in 2013, and if the solar industry improves with the global economy, this stock could end up being a solid rebound play. The average price target (as tracked by S&P Capital IQ) is $4.71 and this would give investors a near double from current levels.
According to Shortsqueeze.com, there are nearly 24.3 million MEMC shares short. Based on average trading volume of around 4.2 million shares per day, it could take about six days worth of volume for shorts to cover. Shorts seem to be hoping for an never-ending amount of bad news for the solar industry to continue, but it is hard to bet against the insiders buying as they tend to know industry trends before others.
Nokia Corporation (NOK) seems like a tough stock to invest in for the long term due to the major challenges it faces from iPhones and other mobile devices. Nokia used to be the dominant player in this industry, but that throne was given up and it will be hard to get it back. However, the stock has rebounded from recent lows and it could have more upside into 2013, because of a very significant short interest. With Nokia shares trading near multi-year lows, there is no doubt that many investors in this company probably have losses in this stock. That makes it a likely candidate for year-end tax-loss selling, which is possibly weighing on the stock now. Once that has lifted, this stock could exhibit additional strength into the New Year and cause shorts to cover. This could particularly be true if Nokia keeps releasing better-than-expected news as it has done recently.
Not long ago, Nokia announced that its newest "Lumia" smartphone was completely sold out almost as soon as it was launched. In the past some investors believed that Nokia could even be a buyout target and since there are still some companies that would like to enter or expand into the smartphone industry, this remains a hope for some investors. With a current market capitalization of about $14 billion, there are a number of companies that could afford to buy Nokia. It's worth considering that Apple's (AAPL) market capitalization is capable of moving up or down by that amount or more in just a single day. Another positive is that Nokia has a strong balance sheet with about $12 billion in cash and around $6.75 billion in debt. While it's harder to make a strong case for Nokia shares in the long run, it is possible to consider that the shares could rally into 2013 as tax-loss selling fades.
According to Shortsqueeze.com, there are nearly 300 million shares short. Based on average trading volume of around 28.5 million shares per day, it could take about 11 days worth of volume for shorts to cover. This might be a decent short in the long term, but now that momentum has shifted to a more positive bias and with the end of tax-loss selling pressure in a couple of weeks, the rally might continue for a few weeks.
Data sourced from Yahoo Finance. No guarantees or representations are made. Please consult a financial advisor before making investments.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in AXAS over the next 72 hours.