The “January effect” long has intrigued academic researchers and stock investors alike. While the definition of the January effect and its causes vary, the historical evidence points to a clear outperformance by stocks in January. The January effect is most often, and most prominently, seen in small-cap stocks that struggled the year before.
The reason behind the January effect is believed to be tax-loss selling. Investors sell losing stocks in December, offsetting capital gains elsewhere. They then repurchase those stocks in January, which allows them to maintain their overall portfolio, but defer taxes on profitable positions.
The academic literature suggests that the January effect should be more prominent in 2017, most notably because the Trump administration and Congress are expected to lower investment tax rates. That makes 2016 tax-loss selling strategies more profitable — since capital gains taxes paid in 2017 and beyond may be at lower rates.
With 2016 coming to a close, here are five stocks to buy to benefit from the January effect.
January Effect Stocks to Buy: Under Armour (UA)
Under Armour Inc (NYSE:UA, NYSE:UAA) has had a challenging 2016. The stock has nearly been halved from spring highs. Confusion around a ticker change related to a stock dividend certainly hasn’t helped, while increasing costs have lowered earnings expectations.
But those troubles also make both UA (the class C shares) and UAA prime candidates for a January effect trade — even if UA stock is hardly a small-cap. Weak trading in December seems to point to tax-loss selling, and the ticker confusion earlier this month likely added to the pressure.
This is a company whose guidance in its third-quarter report still implies 24% revenue growth in 2016. It still has the reigning NBA MVP Stephen Curry on its roster, and it’s still aggressively targeting industry giant Nike Inc (NYSE:NKE). There’s plenty of room for sentiment to reverse — and plenty of reason.
January Effect Stocks to Buy: Amtech Systems (ASYS)
2016 has been an ugly year for the solar industry in general. Post-election fears that a Republican-controlled government would pull back on industry subsidies have led to further selling in solar stocks.
That leaves a number of potential January effect beneficiaries, including “thin film” leader First Solar, Inc. (NASDAQ:FSLR). But an intriguing, albeit risky, play is Amtech Systems, Inc. (NASDAQ:ASYS). With just a $60 million market cap, ASYS stock is trading near its lowest levels since the financial crisis. And Amtech is unprofitable.
What it does have, however, is a strong balance sheet, near tangible book value and increasing volume and weakness toward the end of the year. That seems to imply potential tax-loss selling at the moment, and that would set the stage for a reversal of its negative trend in 2017.
January Effect Stocks to Buy: Biotechnology ETFs
Click to Enlarge As seen in the adjacent chart, the two major biotechnology exchange-traded funds had a very rough month in January 2016. The iShares Nasdaq Biotechnology ETF (NASDAQ:IBB) and the SPDR S&P Biotech (ETF) (NYSE:XBI) both fell over 20% in a worried market that sold risky stocks indiscriminately.
Both ETFs have recovered somewhat, though both remain in the red over the past year — and thus are potential tax-loss selling candidates. XBI is down over 10% since the end of November, and IBB is down nearly 6%.
Trump’s election was a positive for the group, however, and January 2016 was nothing more than an anomaly. Forbes pointed out late in 2015 that biotech stocks traditionally have done very well in January, beating the market by 56% total in the decade leading up to 2015.
One key driver: the J.P. Morgan Healthcare Conference. The presentations there give optimistic takes on clinical trials and drug pipelines, boosting investor spirits and biotech stock prices. That conference begins on Jan. 9 — and investors should consider buying either IBB or its smaller rival XBI ahead of that date.
January Effect Stocks to Buy: Abercrombie & Fitch (ANF)
Investors appear to have finally given up on Abercrombie & Fitch Co. (NYSE:ANF). The company has been promising a turnaround for years, and investors have given ANF stock credit on occasion. In fact, Abercrombie shares cleared $30 in April, before a series of disappointing earnings reports undercut ANF stock.
The long-term potential of the turnaround is up in the air, but from a trading standpoint, ANF looks like an ideal January effect candidate. ANF stock has gone straight downhill in December, losing 25% of its value in just the past three weeks alone.
Some of that pressure likely is coming from tax-loss selling: ANF stock is trading around at its lowest levels in the past 15 years, meaning most shareholders are underwater. New investors in the New Year may better prefer the “get paid to wait” combination of the dividend yield and turnaround possibilities.
January Effect Stocks to Buy: Diplomat Pharmacy (DPLO)
Shares of Diplomat Pharmacy Inc (NYSE:DPLO) fell 60% in barely a week in late October/early November after a poor third-quarter earnings report and the departure of its president and chief financial officer both spooked the market.
DPLO stock was able to gain some ground after the election, but it retreated again in December with tax-loss selling a possible driver. DPLO stock now trades at just 15 times 2016 earnings guidance, and the company plans to challenge the DIR (direct and indirect remuneration) fees that have pressured margins of late.
This is a stock, after all, that traded above $50 in 2015, after nearly quadrupling following its 2014 IPO. With 2017 looking like a possible rebound year, investors may try to get in early on DPLO.
As of this writing, Vince Martin did not hold a position in any of the aforementioned securities.