Are You Ready For The January Effect?

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Includes: AAV, OEXFF, PARXF, URZ, UUUU
by: The Gold Report

Summary

Junior resource companies have had the stuffing knocked out of them; many are oversold and ripe for a bounce.

The current risk/reward is highly skewed to the upside for the TSX.V.

Oil investments should be focused on companies with strong production growth even at lower oil prices based on sustainable capital expenditure programs.

As far back as 1942, economists have noted that small-cap companies in particular tend to surge at the beginning of the year in a cycle known as the January Effect. After the year we have seen in the natural resources space, The Mining Report checked in with sector experts to find out whether they are expecting this traditional gift, how they are preparing for it and what companies could benefit.

Rick Mills, founder, Ahead of the Herd: There has been a general long-term downward trend in the resource sector. Junior resource companies have had the stuffing knocked out of them; many are oversold and ripe for a bounce.

The January Effect is a calendar or seasonal-caused increase in the relative strength of small-cap stocks over large caps in late December and early January. This seasonal effect is mostly over by the end of the first full trading week in January and is not to be confused with the "January Barometer," an old market saw saying, "As goes the full month of January so goes the market for the year."

The January Effect, as it pertains to the junior resource sector, is caused by both large and small individual investors [and institutional investors window dressing-dumping laggards so they won't show up in year-end reports] selling their stocks/rebalancing their portfolios starting in November and well into December to create a tax loss to offset capital gains.

Smart investors and traders buy select stocks, starting as early as late November, through to the last day, or even a day or two beyond, of eligible tax-loss selling for the year.

A great way to leverage any uptick in the uranium price is Uranerz Energy Corp. (NYSEMKT:URZ). [Editor's Note: This interview was conducted on Friday, Jan. 2, 2015. On Monday, Jan. 5, Uranerz announced an all-share buyout by Energy Fuels Inc. (NYSEMKT:UUUU)].

I believe in commodities. If you do as well, then these companies are worth putting on your radar screen.

Steve Palmer, founding partner, president and chief investment officer of AlphaNorth Asset Management: December, January and February are historically the best performing months of the year. There is no reason to believe the current situation will be any different. The TSX Venture index has been under severe pressure over the past few months, which has taken it down 30+% since August. It has recently been below the lows of the 2008 financial crisis despite an economic environment that is far better. I believe the current risk/reward is highly skewed to the upside for the TSX.V.

Angelos Damaskos, founder and CEO of Sector Investment Managers Ltd.: We generally do not trade short-term technical volatility in markets but prefer to focus on fundamental value that is likely to be rerated over the medium term. Nevertheless, given the extreme selling conditions we have experienced in the last four months of 2014 in the energy space, there is a higher probability of a sharp rebound early in 2015. Historical review of previous corrections before the year-end in oil-related shares shows a seasonal pattern of recovery in the first quarter of the following year: The winter double-bottom pattern was observed in 2008-2009, 2006-2007, 2001-2002, 1998-1999, and 1993-1994.

We, therefore, advise our clients to increase their allocations to mid-cap oil producers for three reasons:

1. Extreme adversity against oil shares has led to solid companies trading at Price/Cash Flow and Price/Net Asset Value multiples last seen in the 2008 meltdown;

2. Bearish calls for the oil price dropping below $50/barrel [$50/bbl] are widespread; a contrarian investment view would support a rebound to above $60/bbl. Fundamentally, it is widely accepted that oil prices at $60/bbl are extremely damaging to supply from marginal fields and prolonged trading at this level would result in a lot of supply shut-ins, thus removing any supply overhang within 6-12 months; markets are likely to discount such change in supply with a 3-6 month lead;

3. Large short-selling interest built up in the months of November and December that may be closed on first signs of rebound-mid-cap shares are likely to respond first, followed by small caps after a sustained rally.

We believe, nevertheless, that investments should be focused on companies with strong production growth even at lower oil prices based on sustainable capital expenditure programs [primarily funded out of organic cash flow], lower average cost of production contributing to profits at current prices and strong balance sheets with low debt and fixed obligations. Examples of such companies include RMP Energy Inc. (OTCPK:OEXFF) [RMP:TSX], Advantage Oil and Gas Ltd. (NYSE:AAV) and Parex Resources Inc. (OTCPK:PARXF) [PXT:TSX.V].

We are generally cautious/bearish on the overall markets as we feel global economic growth is likely to slow, impacting earnings expectations. Central banks of both developed and emerging economies may raise interest rates, thus further slowing growth and negatively impacting equity valuations. Resources sectors have been sold off hard, so it is unlikely they would suffer further in correlation to a general market correction.

This interview was conducted by JT Long of The Mining Report and can be read in its entirety here.

Disclosure:

1) JT Long conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, The Life Sciences Report and The Mining Report, and provides services to Streetwise Reports as an employee. She owns, or her family owns, shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of Streetwise Reports: Uranerz Energy Corp. and Energy Fuels Inc. The companies mentioned in this interview were not involved in any aspect of the interview preparation or post-interview editing so the expert could speak independently about the sector. Streetwise Reports does not accept stock in exchange for its services.
3) Rick Mills: I own, or my family owns, shares of the following companies mentioned in this interview: None. I personally am, or my family is, paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I determined and had final say over which companies would be included in the interview based on my research, understanding of the sector and interview theme. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
4) Steve Palmer: I own, or my family owns, shares of the following companies mentioned in this interview: None. I personally am, or my family is, paid by the following companies mentioned in this interview: None. AlphaNorth Funds own all of the companies mentioned. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I determined and had final say over which companies would be included in the interview based on my research, understanding of the sector and interview theme. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
5) Angelo Damaskos: I own, or my family owns, shares of the following companies mentioned in this interview: None. I personally am, or my family is, paid by the following companies mentioned in this interview: None. Funds I advise hold shares in RMP Energy Inc., Advantage Oil and Gas Ltd. and Parex Resources Inc. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I determined and had final say over which companies would be included in the interview based on my research, understanding of the sector and interview theme. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
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Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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