The classic January Effect is a long-observed phenomenon in which smaller stocks tend to outperform in the first month of the year … but sometimes, this occurrence gets a little antsy and sneaks its way back into the Old Year.
This appears to be one of those times.
The reason this effect happens is that many poorly performing smaller stocks are often sold in November — then once they are oversold, they are picked up again.
This sounds all neat and clean, but unfortunately, the liquidity of these stocks tends to be poor, and most of them don’t have tradable options, so they do not hit my radar. And, at any rate, there is no guarantee that any trend this year will last much longer than it takes you to recognize it.
The most interesting developments from my perspective were a recovery in personal computer stocks Dell (NASDAQ:DELL) and Hewlett-Packard (NYSE:HPQ) and hard drive makers Western Digital (NASDAQ:WDC) and Seagate (NASDAQ:STX), as well as memory chip maker Micron Technology (NASDAQ:MU).
Some of these stocks can really blast higher when their fuse is lit because they are heavily shorted and no one believes they can go. They also tend to have big stock buyback programs, so even if the public does not participate, their executives can do the job of raising the shares (and, ahem, their compensation) themselves.
Also, these stocks have been so beaten up that they actually represent a good value. HPQ and DELL in particular are worth multiples of current price, but their hidden strengths in computer services have been overshadowed by their evident weakness in hardware.
Neither company has a mobile communications strategy to speak of, and that has hurt them in the court of public opinion and in valuation. I mean, Dell’s forward P/E is now 6.4 and its price/sales multiple is 0.3. That’s pretty cheap for a company that still does $58 billion in sales per year and is restructuring.
While I’m still waiting to pull the trigger on these names, more aggressive traders might prefer to get in HPQ and DELL early at these current values.
Learn to love volatility or … stand back and watch everything you’ve worked so hard for shrivel up and disappear. Read “How You Can Tame the VIX For Extreme Profits” now. It’s yours FREE here.