A Basket of "January Bounce" Stocks
DECEMBER 24, 2002
INSIDE WALL STREET ONLINE
By Gene Marcial
A Basket of "January Bounce" Stocks
Investment adviser Michael Murphy thinks these eight shares are likely to benefit from the lift a new year often supplies
Now that January is just around the corner, you'll hear plenty of talk on Wall Street about it. One of things often mentioned is the so-called January bounce. Over the past 52 Januaries since 1950, the Dow Jones industrial average has risen 36 times, and the Standard & Poor's 500-stock index has climbed 39 times. In the past 32 Januaries, the Nasdaq composite index has been up 23 times.
Why does the first month of the new year hold such a bountiful promise? For one thing, come every Jan. 2, pension-fund contributions pour into money managers' coffers. They'll be especially large this year, according to some pension-fund followers, because corporations want to make up for underfunded liabilities that the bear market has brought. Contributions from IRAs and 401(k)s also tend to put mutual funds into positive cash flow early in the year.
And January benefits from the tax-loss selling that institutions and individual investors resort to each December: They sell their fallen stocks to post yearend losses for tax-deduction purposes. So by January, they have tons of cash ready to be reinvested. Usually, they buy back in January the same stocks they had sold in December, since these shares are usually selling at lower pices as a result of the tremendous selling in the final month. Bonuses and profit-sharing checks also come into households early in the year and contribute to investors' buying power.
BUY EARLY, SELL QUICKLY. So how can you benefit from this January bounce? Investment adviser Michael Murphy, editor of the California Technology Stock Letter has some specific advice: Buy eight stocks that he thinks can have significant upside moves. They include seven badly beaten-down tech stocks and one health-related issue. "Try not to cherry-pick them. Just buy the basket early and expect to sell around the end of January -- plus or minus a week," advises Murphy.
His eight picks:
1. Charter Communications (CHTR ), the sixth-largest cable operator with 6.7 million subscribers
2. Electronic Data Systems (EDS ), an info-tech services company that generates around 67% of its revenues from long-term operating contracts and roughly 27% from consulting services
3. HealthSouth (HRC ), a leading provider of outpatient surgery, diagnostic imaging, and rehabilitative care services that got hammered last summer
4. Loral Space & Communications (LOR ), a satellite manufacturing and services company
5. Numerical Technologies (NMTC ), an semiconductor design-automation company focusing on the newest chips with the narrowest line widths
6. Three-Five Systems (TFS ), a designer and developer of liquid-crystal displays and liquid-crystal on silicon microdisplays
7. TriQuint Semiconductor (TQNT ), a maker of analog and mixed-signal (digital) chips, primarily for telecoms
8. VeriSign (VRSN ), a provider of Internet trust services for Web sites, enterprises, and e-commerce providers.
Charter, trading at $1.22 a share as of Dec. 23's close, has been clobbered -- down more than 91% so far this year -- worse than the beating that other cables have taken. Charter and its peers have invested billions of dollars in network upgrades over the past seven years so they can offer not just basic cable TV but also Internet access, telephony, and digital TV. Such an upgrade for Charter resulted in huge debts -- some $18.4 billion, vs. cash of $508 million, notes Murphy. So far, demand for these services has been tepid, prompting investors to rush out of the stock.
HAMMERED DOWN. "What we expect will happen is that the stock will be bid up again in January -- especially if investors are reminded that Charter is backed by Microsoft co-founder Paul Allen who's unlikely to allow the company to go under," says Murphy.
Electronic Data System, trading around $18 a share, is down from its high of $68.40 reached in January of 2001. It has suffered from tax-loss selling. With its yield of 3.2%, Murphys sees the stock quickly rebounding 30% to 40%.
HealthSouth has been hammered down from its 52-week high in 2002 of $15.90 a share to just $3.88. It says new Medicare rules would no longer allow the reimbursement of care given to certain physical therapy groups. That has a big impact on earnings and revenues, notes Murphy, and has added to the yearend selling pressure. But he thinks a January bounce could push up the stock to over $6 again.
WHERE'S THE DEMAND? Loral is going through difficult times, and its stock is way down from its 52-week high of $3.27 to just 37 cents. In commercial satellites, supply exceeds demand as the projected rise in Internet traffic didn't materialize, nor has demand in TV and telecom services. Loral has cut its debt by more than $1.2 billion and has eliminated $21 million in dividends.
It will continue to post losses in 2003, says Murphy, and depending on the shape of the economic recovery, Loral may have to raise more funds. But he doesn't think it faces an immediate liquidity crunch.
Numerical Technologies has crashed from its 52-week high of $39 on January 7, 2002, to $3.30, as the semiconductor industry continues in a slump. Murphy says 2003 should bring a sharp increase in chips requiring the latest ultrathin processses -- and general growth in semiconductors. At 27 times depressed earnings, says Murphy, Numerical stock looks like a classic January bounce stock.
BIG CUSTOMERS. Three-Five Systems, down from its 52-week high of $18.19, is now around $6.30. Historically, more than 80% of revenues come from the sale of liquid-crystal displays to mobile-phone makers, notably Motorola (MOT ). But the weakened demand for mobile handsets since 2000 has hurt. Still, Murphy says the high percentage of shares held by institutions and the stock's big decline qualify Three-Five as a January bounce bet.
TriQuint, now trading at $4.18 a share -- down from its 52-week high of $14 -- has big customers such as Nokia (NOK ), Boeing (BA ), Ericsson (ECNSF ), and Raytheon (RTN ). However, capital spending in these industries continues to be weak. TriQuint has no earnings, but the stock sells at only 0.9 times sales and less than 16 times cash flow, says Murphy.
VeriSign, another big loser whose stock has dropped from its 52-week high of $43.57 to $8.71, is also a stock that Murphy thinks will rebound strongly after a December sell-off.
Although he's confident that the new year will give these stocks a lift, he isn't necesarily recommending all of them for the long-term. Just play them, he says, purely as January bounces.
Marcial is BusinessWeek's Inside Wall Street columnist
Please Note: Marcial will be on vacation next week. His column will return on Jan. 7
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