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Seasonality: The Best Bets For Q1 2020

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Includes: BKNG, COO, CTSH, DIA, DPZ, EFA, GLD, HYG, IWM, LQD, MDY, MOO, MUB, POOL, QQQ, SKX, SPY, SWKS, TIP, UHS, XLK, XSD
by: Limelight Alpha Management Partners
Limelight Alpha Management Partners
Long/short equity, Growth, medium-term horizon, registered investment advisor
Summary

Mid-cap and small-cap stocks offer strong seasonal tailwinds in Q1.

Technology and Agribusiness are top Q1 seasonal picks.

Top stocks with robust first-quarter seasonality include Booking Holdings, Domino's Pizza, and Skyworks Solutions.

The New Year brings new opportunities and risks. Trade deals (or the lack thereof), Federal Reserve rate policy uncertainty, and inevitable drama associated with a Presidential election year may mean you face crosscurrents in 2020, especially given 2019's stellar returns.

To help you navigate these crosscurrents in the first quarter, it may help to focus on the seasonally strongest sectors, industries, and stocks over the past 10 years. Ultimately, there's no guarantee these stocks will repeat their winning ways, but to paraphrase Mark Twain, history often rhymes, suggesting these baskets and individual stocks are -- at a minimum -- worth watching.

A look at market index seasonality

The following table shows historical seasonality for major markets, using ETFs as a proxy. Mid cap stocks, as measured by the SPDR S&P MidCap 400 ETF (MDY), traditionally deliver the highest average and median return in the first quarter, outperforming the SPDR S&P 500 Trust (SPY), the iShares Russell 2000 (IWM), Invesco QQQ (QQQ), iShares MSCI EAFE (EFA), and SPDR Dow Jones Industrial Average (DIA).

Source: Limelight Alpha.

The strong performance by mid cap stocks (and small cap stocks to a lesser extent) isn't too surprising given the well-known "January Effect", a period of historical excess return for smaller market cap companies from mid-December through March.

The best seasonal sectors and industries

The next table shows ETFs in our coverage that have gained ground in at least nine of the past 10 Q1s. It's an eclectic list.

The Technology Select Sector SPDR ETF (XLK), SPDR S&P Semiconductor ETF (XSD), and VanEck Vectors Agribusiness ETF (MOO) have all posted gains in each of the past 10 years.

It will be interesting to see if semiconductor and more broadly, technology stocks can repeat seasonal strength this year given semiconductor stocks will need to build upon solid fourth quarter gains (semi's have strong Q4 seasonality, too) and many software stocks endured profit-taking in the second-half of 2019. In agribusiness, the return of seasonal strength is timely given the potential for increased purchasing activity associated with phase 1 of the China-U.S. trade truce last month.

First-quarter sector and industry strength isn't limited to stocks, either. The SPDR Gold Trust ETF (GLD) and bonds have a solid track record, too. In bonds, the iShares iBoxx $ High Yield Corporate Bond (HYG) has been an especially good performer, but the iShares iBoxx Investment Grade Corporate Bond ETF (LQD), iShares National Muni Bond ETF (MUB), and iShares TIPS Bond ETF (TIP) are also worth considering based on seasonality.

Source: Limelight Alpha.

The best stocks for seasonal strength

The following table shows the seasonally strongest stocks in our 1,600-stock universe over the past decade across all market caps, sectors, and industries.

Although these stocks have an impressive track record for delivering gains this quarter, a number of stocks have gained a median 10% or more in the quarter over the past 10 years, including Booking Holdings (BKNG), Cooper Companies (COO), Cognizant Technology Solutions (CTSH), Domino's Pizza (DPZ), Pool Corp. (POOL), Skyworks Solutions (SWKS), Universal Health Services (UHS), and Sketchers U.S.A. (SKX).

Investors interested in escaping cold weather by traveling or dining-in may propel Booking Holdings and Domino's Pizza higher again this year. Post-holiday earnings reports could help stocks like Sketchers and VF Corp. (NYSE:VFC) this quarter, too. Tax-planning season could support tax preparation provider Intuit (NASDAQ:INTU) through April and demand for health services is usually highest in Q4 and Q1 at acute care hospitals, providing Universal Health Services a seasonal tailwind as well.

Nevertheless, investors should remember there's no guarantee that strong seasonal stocks -- like those in the following list -- will trade higher in the coming months, so make sure (as always!) to do your due diligence before buying based on the seasonal price performance of these companies.

Source: Limelight Alpha.

Disclosure: I am/we are long DPZ, INTU, VFC, IWM, MDY, XSD, IGV. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.