The Best Seasonal Large Caps For Q1

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Includes: CHKP, CVS, DRI, FTI, GLW, MOS, PCLN, POT, RAD, ROST, SHLD, SPY, STJ, T, VFC, WBA, XLNX
by: Todd Campbell

Every quarter my research team at E.B. Capital Markets, LLC, crunches the numbers to find stocks with the best history of gains. The list is a starting point for identifying names likely to benefit from seasonal sector and industry tailwinds. Typically, the list is eclectic - offering a little something for just about everyone.

In all, out of over 400 large-cap stocks, 15 make the cut. Over the past five years, each has finished the first quarter higher. Given the S&P 500 ETF SPY has finished higher in three of the past five and six of the past 10 Q1s - unequivocally neutral - history suggests there's something more than market direction moving these stocks in the first quarter.

While there are a number of stocks to choose from in other sectors, only one consumer, healthcare and industrial goods stock offer robust seasonality in the first quarter. Each looks attractive, with VF Corp (NYSE:VFC) enjoying nearly 50% organic growth in Asia, St Jude (NYSE:STJ) riding demographics driven growth in cardiac procedures and Flowserve's (NYSE:FLS) pumps and aftermarket parts benefiting from strong oil rig activity and pipeline expansion.

Symbol

SECTOR

Q1 Average Return

VFC

CONSUMER GOODS

9.21%

STJ

HEALTHCARE

10.18%

FLS

INDUSTRIAL GOODS

11.44%

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In basic materials, there are four seasonally strong stocks, including two fertilizer plays: Mosaic (NYSE:MOS) and Potash (NYSE:POT). Both have sold down sharply from Q1 2011 peaks. Typically, excitement builds through Q1 as the USDA updates corn and soybean acreage and planting forecasts. Fertilizer per ton prices remain higher, year-over-year, with Potash pricing near $642 per ton, up from $566 per ton last January, and phosphates, such as DAP, pricing at $693, up from $669. Also in basics, FMC Technologies (NYSE:FTI) demand is increasing thanks to a recovery in Gulf of Mexico drilling, and Pioneer Natural Resources (NYSE:PXD) is leveraging Permian Basin, Eagle Ford and Barnett Shale acreage for production upside.

Symbol

SECTOR

Q1 Average Return

FTI

BASIC MATERIALS

12.65%

MOS

BASIC MATERIALS

12.02%

POT

BASIC MATERIALS

10.87%

PXD

BASIC MATERIALS

9.25%

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Retailers also are intriguing Q1 plays. The media gets laser focused on holiday earnings as they're reported in February, which helps many move higher. Two pure retailers have posted gains in Q1 in each of the past five years. One is Ross Stores (NASDAQ:ROST), an off-price apparel retailer benefiting from consumers' ongoing low price appetite. The other, Sears (NASDAQ:SHLD), has fallen sharply after guiding poor holiday sales and future store closures. Whether investors have overshot pessimism on Sears is a gamble at best, suggesting stop losses are a must.

Also in services, Darden Restaurants (NYSE:DRI), the operator of struggling Olive Garden, posts solid seasonality. If Darden can spark its Olive Garden brand with its planned menu, pricing and promotion changes, the stock will move higher. In the meantime, investors will be paid thanks to a solid 3.8% yield. Walgreens (WAG) also posts strong seasonality thanks to cold and flu season. If fears of lost business tied to its expiring Express Scripts contract are overblown, or a last minute peace accord is struck, the company should keep customers from converting to competitors CVS Corp (NYSE:CVS) and Rite Aid (NYSE:RAD).

Symbol

SECTOR

Q1 Average Return

ROST

SERVICES

18.95%

DRI

SERVICES

15.57%

SHLD

SERVICES

13.38%

WAG

SERVICES

2.21%

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Finally, four technology stocks have a strong history of Q1 upside. Cabin fever supports vacation bookings at Priceline (NASDAQ:PCLN) in the quarter. However, Priceline, which gets 88% of its consolidated profit overseas, has risk tied to currency conversion and European hotel bookings, suggesting a stop loss is necessary. Corning (NYSE:GLW) usually does well on the heels of holiday driven TV and smart phone sales. This year, tablet sales add another demand driver for its gorilla glass. With a 2.3% dividend yield and over $4 per share in cash, risk is a bit contained. At Xilinx (NASDAQ:XLNX), 61% of sales come from third party distributors. Given its warning, if channel inventories were drawn down too much in Q4, the company may see strength in Q1. In particular, with A T&T (NYSE:T) and T-Mobile refocused, communications demand - which stalled since Q2 - may move higher. New product launches at Checkpoint (NASDAQ:CHKP) in October help the company lock up sales into fiscal year end spending, supporting Q1.

Symbol

SECTOR

Q1 Average Return

PCLN

TECHNOLOGY

15.56%

GLW

TECHNOLOGY

14.78%

XLNX

TECHNOLOGY

8.45%

CHKP

TECHNOLOGY

6.89%

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Seasonality is just one more way investors can identify potential investments. Obviously, catalysts have to be identified and risks weighed. But knowing which names have a history of outperforming gives shareholders an additional edge into the New Year.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in GLW, CHKP, POT, MOS, WAG over the next 72 hours.