It turns out that, in recent years, the January effect has been starting earlier. Now, beaten-down stocks often start recovering in November. It's probably no coincidence that mutual funds close their books on Oct. 31.
So it appears that by late November, the best January-effect prospects have already started their move.
Here's my latest attempt to pick stocks primed for a January -- or earlier -- pop.
First, find the losers
I'll start by limiting the field to stocks that lost significant money for their shareholders this year. I define significant as at least a 20% drop, which should be enough to entice holders to consider taking a tax write-off.
But, to be on the safe side, I set the maximum loss at 75%. Stocks with bigger loses could be terminal, and are thus riskier. Since I arbitrarily selected 75%, try reducing the maximum loss to 60% or so, if you want to decrease your risk.
Screening parameter: % Price Change YTD <= -20
Screening parameter: % Price Change YTD >= -75
Staying small
Most studies have found the January effect is more pronounced for small-cap stocks, so I'm limiting the field to that category.
Market capitalization (last share price multiplied by the number of shares outstanding) is the total you'd have to shell out to buy all of a company's shares. There is no precise definition for the boundary between small- and mid-cap stocks, but most experts put it in the $1 billion-to-$2 billion range. I set my upper limit at $1 billion, but you can increase the cutoff to $2 billion if you want to see more stocks.
Screening parameter: Market Capitalization <= 1,000,000,000
Not too cheap
Very low share-trading prices signal that the market wants nothing to do with the stock, probably because many investors see serious problems. I set the minimum acceptable recent trading price at $5. Try increasing the limit to $10 if you want to further reduce your risk.
Screening parameter: Last Price >= 5
Don't fight Wall Street
Wall Street analysts' buy and sell ratings and earnings forecasts are a major factor determining stock price direction, at least in the short run. All else equal, stocks with strong growth prospects and buy recommendations from analysts are your best short-term prospects.
MSN divides analysts' ratings into five categories: "strong buy," "moderate buy," "hold," "moderate sell" and "strong sell." Many market players interpret "hold" recommendations as advising selling. We only want stocks with "moderate buy" or "strong buy" ratings.
Screening parameter: Mean Recommendation >= Moderate Buy
Growth investors usually look for stocks with a forecast of at least 15% annual earnings growth. Thus, I set 15% as my minimum earnings growth requirement for the next fiscal year, and a minimum 15% average annual earnings growth for the next five years. If you want stronger candidates, try increasing the minimums to 20%.
Screening parameter: EPS Growth Next Yr >= 15
Screening parameter: EPS Growth Next 5-Yr >= 15
On the mend
As I mentioned earlier, I found that the best January bounce candidates have already started back up. Comparing a stock's current trading price to its moving average is a good way to determine whether a stock is trending up or down. Stocks above their moving average are said to be in an uptrend, and those below in a downtrend.
Generally, analysts use the 200-day moving average to gauge long-term trends and the 50-day moving average for short-term movements. Since we're looking for a recent reversal, the 50-day moving average is the most appropriate.
Screening parameter: Last Price >= 50-Day Moving Average
My January-bounce screen turned up 13 candidates. The list represented a variety of industries. Only one sector, oil and gas, with three entries, was overrepresented. Even there, the three entries were in different industry segments.
Company Recent price Industry
AtriCure (ATRC, news, msgs) 8.12
Medical instruments & supplies
Bronco Drilling (BRNC, news, msgs) 17.25
Oil & gas drilling & exploration
Champion Enterprises (CHB, news, msgs) 9.27
Manufactured housing
Edge Petroleum (EPEX, news, msgs) 18.61
Independent oil & gas
Fleetwood Enterprises (FLE, news, msgs) 7.58
Recreational vehicles
Interoil (IOC, news, msgs) 21.9
Oil & gas refining & marketing
Ixia (XXIA, news, msgs) 10.01
Semiconductor equipment & materials
Linktone (LTON, news, msgs) 6.21
Wireless communications
Matria Healthcare (MATR, news, msgs) 29.89
Home health care
North Pointe Holdings (NPTE, news, msgs) 9.6
Property & casualty insurance
On Track Innovations (OTIV, news, msgs) 7.4
Semiconductor - specialized
Rimage (RIMG, news, msgs) 23.08
Computer peripherals
ViroPharma (VPHM, news, msgs) 13.56
Biotechnology
The results of any screen, this one included, should be considered candidates for further research, not a buy list. If you do plan to play your hand at picking January stocks, make your purchases by the end of November. Last year, although they scored bigger gains in January, all but two of my picks moved up in December.
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deleted- artc, epex, ioc, otiv. ntpe. |
