The January effect is a money making opportunity in the stock market. This effect tends to cause prices of some stocks to rise more than the averages in the month of January.
There are two explanations for this phenomenon. First, tax sensitive investors sell depressed stocks prior to the year-end to take capital losses on their tax returns. This tax related selling further depresses prices of the already depressed stocks. Second, Wall Street professionals get big bonuses in the month of January; these professionals hunt for bargain stocks in January and drive up the prices of previously depressed stocks.
When I started investing 30 years ago, an investor could take advantage of the January effect by buying depressed stocks in the last week of December. However, as this phenomenon got more and more well known, investors tended to buy the depressed stocks earlier and earlier. Over the last two years, the buying opportunities were in November.
In my experience over the last 30 years, I have made money from this effect about 75% of the time, lost money about 15% of the time, and the rest of the time broke even.
The traditional widely accepted way to benefit from this effect is to buy only small cap stocks before the year end and sell them in late January. In my experience, the effect is not limited to small stocks.
I have successfully increased the returns generally available from this effect by about 100% by proper stock selection, by properly timing the purchases, and by properly timing the sales using the ZYX Change Method.
Here are five examples of the type of stocks that may be considered:
Research In Motion (RIMM)
The stock has been slaughtered this year. When the stock was much higher, I had predicted that the stock would head toward $20 in my article titled Research In Motion On Way To $20
As of this writing the stock is trading at $18.97 exceeding my predicted target. This price is less than the total net assets of the company. Moreover, the company still has about 70,000,000 subscribers.
Penson Worldwide Inc (OTC:PNSN)
Penson provides clearing services, infrastructure products, and a variety of related services to the financial services industry.
The stock has been depressed because of a bad investment the company made. Penson is also a prime acquisition target.
In 2012, Penson can easily earn $0.30. At the present price of $1.20 the stock is trading at a PE of four.
Clearwire Corporation (CLWR)
At The Arora Report, we continue to see the spectrum owned by Clearwire as very valuable. Our thesis has been that mobile devices will continue to proliferate requiring more and more spectrum. Sooner or later, a bigger firm requiring spectrum will turn to Clearwire.
Sprint owns 54% of Clearwire. Sprint (NYSE:S) relies on Clearwire for its 4G network. Clearwire uses a technology called Wimax for 4G.
Apple (NASDAQ:AAPL) is supporting a competing technology called LTE. Clearwire has announced that it will build an LTE network. It is not clear where Clearwire will get the money to build LTE network.
For the first time Sprint is now carrying Apple iPhone. Sprint has made a $20 billion commitment to buy from AAPL. As part of Sprint’s deal with Apple or as a consequence of the deal, Sprint now has to shift to LTE from Wimax.
Sprint announced that it will no longer sell Clearwire products after 2012 and will build its own LTE network. It is not clear if this network will be in parallel to the efforts to build an LTE network at Clearwire.
In an email, Clearwire states that Sprint is still dependent on Clearwire for 4G.
The long and short of this development is that Clearwire is a sacrificial lamb for Sprint to get Apple iPhone.
This development does not reduce the value of the spectrum owned by Clearwire in the very long-term, provided Clearwire can hang in until someone desperately wants to buy spectrum.
Lately there are indications that Sprint may continue to work with Clearwire.
Coldwater Creek Inc. (NASDAQ:CWTR)
Coldwater is a specialty retailer.
Over the years, we have made lots of money by following the same strategy that we are following on Coldwater. Specialty retailers are hit hard when they repeatedly get the fashion wrong. Most of the time, sooner or later they start getting the fashion right and then the stocks bounce back rapidly.
Coldwater has seen major insider buying.
Our on the ground research shows that the merchandise in the stores is beginning to get in line with what customers want.
OmniVision Technologies Inc. (NASDAQ:OVTI)
This company is a major manufacturer of image sensors. The stock has been depressed due to concerns about competition. For background please see my article Apple And The OmniVision Camera Mystery.
OmniVision can easily earn $2.50 next year giving it a PE of 7.
The Arora Report advocates a basket strategy to reduce risk. We have narrowed down our buy list to 73 stocks and 18 closed end funds to benefit from the January effect. The five stocks listed above are included in our list of 73 stocks, but otherwise have no special significance over other stocks on the list. We will be carefully watching these to grab the best opportunities as they occur. It is like a hunter stalking a prey. We expect to buy a basket between now and the end of the year. Our goal will be to sell these stocks between late January and early March.
Disclosure: I am long AAPL, CLWR, CWTR, PNSN.
Additional disclosure: Subscribers to ZYX Buy Change Alert may be holding long positions in the same symbols.