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Trading The January Effect: 10 Stocks To Make A Bet On For Re-Bound

Well, it's that time of year, Christmas Trees, the Menorah, and tax loss selling. And what I am interested in is tax loss selling creating the opportunity called the "January Effect". The January Effect is a seasonal anomaly driven by tax loss selling or selling stocks significantly down for year to date. Investors tend to manage their tax exposure by selling their losing investments and keeping their winners for the new fiscal year, therefore pushing the tax bill out 12 months. However, in doing so, they have often drive down and further depress their losing investments such that when January rolls in these losing stocks enjoy a big rebound. Alternatively, high priced winners (i.e. stocks selling at high valuations) often significantly under perform in January as investors often take profits in the new fiscal or tax year.

Supporting Evidence of the Jan-Effect

Haug and Hirschey in their paper entitled The January Effect published in 2005 from the University of Kansas offer quite convincing evidence of the phenomena. They write, "From 1904-74, the average stock market return during the month of January was 3.48 percent, compared with a monthly return of 0.42 percent during the remaining 11 months of the year. Thus, January returns appeared to be more than eight times higher than returns during a typical month." They go on to site Reinganum (1983) and Roll (1983), among others, confirm the January effect is a small cap phenomenon. They offer an alternative explanation for the effect other than tax selling that is the window dressing effect. "According to the window dressing hypothesis, institutional investors are evaluated both upon their investment results and the consistency of their investment philosophy. At the end of the calendar year or any important reporting period, such investors may be prone to sell losers and buy winners to improve perceived performance." However, whatever explanation one relies on the effect appears quite real.

Things to know about the January Effect

There are several characteristics that a potential trader might want to know. The effect is that it is stronger in some years and weaker in others. It tends to be more pronounced among small company stocks rather than large capitalization companies. So, a potential trader should probably focus on stocks less than $1 billion in market capitalization. It also tends to be stronger among stocks that would qualify as value stocks so fundamental characteristics should also be considered such as price to book value and price to earnings. Finally, the companies that show up in these screens usually have problems, and that is why they are depressed. We think it makes sense to focus on companies where we can get comfortable with the balance sheet.

Our List of Candidates

 

 

Symbol

Name

Industry

Last Sale

YTD Performance

Price to Book Value

Forward PE

ACTG

Acacia

Services

12.73

(45.36%)

1.06

9.3

CALL

Vocal Tech

Technology

12.29

(25.06%)

N/A

5.00

EZPW

Ezcorp

Retail

10.31

(46.44%)

0.60

5.38

WLT

Walter Energy

Material

14.41

(59.61%)

1.10

NA

CRUS

Crus Logic

Technology

19.59

(28.22%)

2.05

10.88

NTGR

Netgear

Technology

30.78

(17.35%)

1.45

12.67

XXIA

Ixia

Technology

12.38

(18.55%)

1.92

13.60

FIO

Fusion Io

Technology

8.40

(64.30%)

1.89

NA

UTEK

Ultratech

Technology

26.85

(21.83%)

1.86

15.98

INFI

Infinity Pharmaceuticals

Healthcare

12.96

(56.80%)

2.77

NA

JAKK

Jakks Pacific

Retail

6.21

(50.68%)

0.81

62.10

OFIX

Orthofix Int

Healthcare

20.46

(44.70%)

0.99

9.6

GORO

Gold Resources

Materials/Gold

4.85

(68.65%)

3.12

19.25

Disclosure: I am long EZPW. 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.