The January Effect is well known (and well played by traders) in the US stock market. In addition to the numerous trader articles, there are scholarly studies that suggest that the January bounce is particularly pronounced amongst small stocks where the bounce back from tax-loss selling can be more pronounced even with small swings in the trade. If you're a nimble trader, you can play that 'dead cat bounce', but there is also an opportunity here for the investor to pick up a good stock at a great price. To quote a wise man, "Price is what you pay, value is what you get'.
Another contrarian philosophy in small-caps is to try to maximize returns by buying stocks with bad technicals and a catalyst on the fundamentals. Note that this is the exact opposite of technical analysis which is obsessed with good technicals and a quick buck, and only somewhat similar to deep value investing where you buy cheap and wait (potentially forever). Highly regarded investment firms such as Standpoint (which is in the 91st percentile in returns and 97th in accuracy for 2011) explicitly state this as their analysis methodology.
Here are my five January Worthies (in order of drum roll power), below. To the earlier point about bad technicals being good, I've included the well known technician Louis Navellier's freely available stock grading service ratings in Figure 1 below as evidence of the same. As you can see the ratings of four of the five are somewhere between unremarkable and abysmal, and the fifth is too small to count in Louis's 5000-stock database. So what's the evidence of a contrarian view on these five small caps? Well, see below :
- Applied Micro Circuits (AMCC). A high flier surviving a ten year drought is rare. An optical company with insider buying is rare. A small company making a big but credible gamble is rare. And as I wrote here, AMCC is all three. If you're looking for a wild January ride, AMCC is likely to be on the tame side. But it was genuinely oversold, is currently trending positive and has a catalyst in both the next month and the next six in their X-Gene efforts.
- Triquint (TQNT). TQNT traded down from an October $7 value to the current $4 and change, due to its uninspiring earnings on the October quarter. But if you consider the multiple insider buys recently in the $4.25 to $5.25 range, and the bright future of Gallium Nitride technologies (at which TQNT is a veteran) in LED's, the stock is a viable company at a bargain price.
Figure 1. January Worthies as viewed by Louis Navellier's Portfolio Grader
- NPS Pharmaceuticals (NPSP). NPSP is a biotech that primarily focuses on developing treatments for patients with uncommon gastrointestinal issues, and endocrine disorders. This is a market is largely untapped thus far. The stock has been in a malaise for most of the second half of 2011. But the positive results on their Short Bowel Syndrome (SBS) drug, and the recent cluster buying of the stock in the $5.50 range that this stock has room to run. The fact that October to April is seasonally strong for Biotechs (given all the analyst conferences and the forward looking excitement therein) is a meaningful plus. You could argue that the run to its current $6.50 price is a bit fast and a bit far, but the number is far below the $10 price target that is prevalent for the stock given the positives on the GATTEX drug for SBS.
- Active Power (ACPW). Active Power, a pioneer of Flywheel technologies, was trading at a low of $0.66 on January 4th, close to its 52-week low of $0.59 and far cry from its high of $3.03. The departure of their CEO to 'pursue other interests' led to a decline from about $1.40 to the current price of $0.70 and change, with little else changing at the company. A large investor (Kinderhook Partners) who's had an equity stake in the company since 2008 just bought a million shares at between $0.59 and $0.80. The inevitable annoucement of a new CEO should be a new catalyst that makes the January 5th rise of 10% on the stock a trend over a one time event.
- Oclaro (OCLR). Why is a stock with a $4.41 book value trading at $3 and change? Answer, Thai floods. The flooding of contract manufacturing sites in Thailand led to an unknown in OCLR's ability to meet customer demand, and Wall Street doesn't like unknowns. But this isn't the customer demand going away. It isn't like we're awash in bandwidth, in fact quite the opposite. And as it turns out, the recovery from the Thai floods was quicker than anticipated and OCLR offered some clarity on this issue and upped its 4th quarter guidance. Consider the pent up demand, better guidance and the fact that OCLR was about $4.50 in summer when the floods hit (and summer is a scary time for Technology stocks!), and you can imagine good things happening here. As I write this, OCLR galloped to a 15% gain today, but there's more room to run.