The January Effect on Mining Companies
By Ben Abelson
02 Jan 2007 at 04:26 PM EST
resourceinvestor.com
CHICAGO (ResourceInvestor.com) -- While the efficiency of the markets has arbitraged away many of the most popular seasonal investing trends, the so-called “January Effect” continues to exert a powerful effect on the markets.
For mineral investors on the lookout for early 2007 bargains, jumping in front of this powerful trend can be a terrific way to get behind shares with strong fundamentals and surging momentum.
Background on “The January Effect”
For those unfamiliar, I’ve outlined the basic premise of the January Effect.
Throughout the last few weeks of December, U.S.-based funds and individuals often sell the year’s biggest losing investments in order to claim capital losses – which are then used to balance out the capital gains realized from other investments, reducing the investor’s tax liability. The net effect of these sales, of course, is to further depress the shares of those investments most beaten down in the past year.
However, as the New Year begins, investors who still believe in the fundamentals of a company tend to buy into the now heavily discounted stock. This often results in the shares of companies hit hardest in December being among the best performers in January. Academic financial journals from some of the most respected institutions have fully documented this effect, which continues to persist year-after-year thanks to the nuances of U.S. tax law.
Shares of volatile, small-cap companies tend to be among those hardest hit by December sales – and among those that have the strongest bounce back in January. (But just as the tax-loss selling took several weeks to emerge over the year-end, the January effect is most often seen by a gradual upward trend in stock prices, rather than a sudden one-day surge.)
The bottom line? This strong seasonal trend has created opportunities that have not yet been arbitraged away, and that astute investors can leverage over the next few weeks.
Scraping the Barrel for Opportunities
An easy way to begin searching for potential beneficiaries of the January effect is to screen for companies that have underperformed their respective peers over 2006 (with a specific eye toward December underperformance), and then examine those that appear to have the strongest fundamentals.
Of course, that’s a tremendous amount of work, and easier said than done. Rather than go through that process, I prefer to spend the end of December and early January taking a look at some of my favourite laggards from among the several dozen mineral companies that I regularly follow.
Each year, there are companies with strong assets and operations that have fallen out of favour for one reason or another. The next few weeks may be among the best chances to buy these shares.
Late last year, for example, shares of Northgate Minerals [AMEX:NXG; TSX:NGX] and Nevsun Resources [AMEX:NSU; TSX:NSU] had been heavily discounted due to a variety of operational and other issues. Investors who took a look at their shares on my late November recommendation would have been able to realize a strong surge beginning in early January, and continuing through the spring.
Now, that’s not to say that we can attribute all of their performance to January buying, but merely to point out the start of the year - when technical trends align with fundamentals for undervalued companies - as one of the best times to place bets on some of the most beaten down names.
Food for Thought
While their absolute losses may not be extreme, several of the mining companies that I’ve highlighted over the past year continue to remain significantly undervalued relative to their peers – and are prime potential beneficiaries of January buying.
European Minerals [TSX:EPM; AIM:AUM; OTCPK:EPMCF], which I’ve written about frequently in the past, remains one of my favourites. After financing delays, the London-based junior is working toward getting their Kazakh copper-gold mine up and running by Q3. Still, with significantly delays in its recent past (through no fault of company management), the market continues to under-appreciate the mammoth cash-flow potential of EPM’s 4 million gold-equivalent ounce mine.
Although European Minerals’ U.S.-listed shares saw a decent gain in December, this was only on the back of a year of underperformance and heavy mid-fall selling (possibly motivated by early tax-loss sellers).
European Minerals has the potential to see a strong rebound this year as the company continues its construction progress and releases an updated reserve statement. While one day is certainly not a terribly valuable predictor, at last glance the shares were already up 8%-9% on strong volume in their first day of 2007 trading in Toronto.
I’m convinced that institutional investors have put Golden Star Resources [AMEX:GSS; TSX:GSC] on their short list of most hated firms for the company’s continued share price underperformance and operational snafus. But with Golden Star looking to turn around their operations by early Q2, and the shares entering 2007 with only a slim gain in 2006, the company remains among the most undervalued mid-tier producers. Watch for upside progress as investors start to pile back into the company on strong fundamentals.
Conclusion
When investing, it’s always wise to remember that momentum that begets momentum. Upward trends that begin as a bounce-back to tax-loss selling and on the anticipation of strong fundamentals can continue throughout the first quarter with little fundamental reason. By taking money off the table in bits and pieces, investors can protect their initial investment while continuing to benefit from upward moves. |
