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How to Take Advantage of the January Effect (ACTS, BLD, CNTY, FORD)?

John Emerson

John Emerson

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The holiday season has once again arrived, a time to "frolic and play the Eskimo way" as the old song goes. Unfortunately, I have become too old to frolic anymore, but I still enjoy the season immensely.

Investors should not merely engage in the traditional revelry of the season, they should also engage in some serious stock research during the period. You see, the holiday season offers its own version of "Black Friday," a period when stocks frequently come on sale, due to the phenomena known as the January Effect.

The January Effect

The January Effect refers to the tendency of stocks prices to advance during the first month of the new calendar year. The effect is most predominant for the smaller stocks which are frequently sold for tax loss purposes by individual investors prior to the end of the year. The following chart reveals that the January Effect really starts in November. From a statistical prospective the best time to own stocks is the during the three month period from November through January.



Donald B. Keim is credited with documenting the January Effect in a research paper he wrote for The Journal of Financial Economic in 1983. http://www.buec.udel.edu/coughenj/finc872_keim_jfe1983.pdf Since that time numerous studies have been performed which point to the fact that the smaller stocks tend to outperform their larger brethren during January.

Haug and Hirschey performed an exhaustive review of the literature regarding the January Effect and drew the following conclusions:

1) A persistent January Effect existed for small-cap stocks from 1927 to 2004.

2) The January Effect was positively correlated with value stocks as well as smaller stocks.

3) Momentum stocks were negatively correlated with the January Effect.

http://web.ku.edu/~finmhir/documents/Hirschey_JanuaryEffect.pdf

In other words, to achieve the maximum benefit from the January Effect, investors should actively seek out and purchase small-cap value stocks late in the calendar year.

Suggestions on Finding January Effect Candidates

The best place to look for oversold and undervalued candidates is by scouring the list of 52-week lows. http://www.barchart.com/stocks/newhilo.php?what=prclowc_YTDL_V<100_T&dwm=

January Effect candidates can also be isolated by utilizing net-net screens or screens which show stocks with low P/B ratios. One such screen is provided free of charge by The Graham Investor. http://www.grahaminvestor.com/screens/graham-ncav-stock-screen-new/

GuruFocus also provides a net-net screen for premium subscribers. http://www.gurufocus.com/grahamncav.php As well as a screen for low P/B value stocks. http://www.gurufocus.com/lowpb.php

A List of January Effect Candidates

This is the time of year when I look for extremely oversold micro-cap stocks with strong balance sheets which are trading near their 52 week lows. In many cases sellers are willing to unload their positions in order to offset taxable capital gains. Of course, during up market years more candidates exist since the majority of investors have accrued significant capital gains. In the spirit of reducing their tax burdens, investors are more likely to sell losers without regard to their underlying value.

I believe the following list of stocks is worthy of investigation as January Effect candidates: ACTS, BLD, CNTY, FORD, LAKE, NTZ, TATT, UUU, and WILC

Off course, many other potential candidates exist and I would be interested in hearing from any readers who have suggestions. I hope everyone has a wonderful and profitable holiday season.

Disclosure: Long ACTS, CNTY, TATT; no position in other stocks.

About the author:

John Emerson
I have been of student of value investing since the mid 1990s. I have continued to read and study value theory on an ongoing basis. My investment philosophy most closely resembles Walter Schloss although I employ considerably less diversification. I also pattern my style after Buffett's early investment career when he was able to purchase shares of tiny companies.

Rating: 3.3/5 (10 votes)

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