9 Best Stocks to Buy for the Santa Claus Rally

best stocks to buy for December - 9 Best Stocks to Buy for the Santa Claus Rally

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Whatever your approach to the markets, whether you adopt fundamental analysis, technical analysis or some other methodology, everyone who participates is always looking for an edge to determine which are the best stocks to buy for December. Historically, this has led to some unusual tactics. Among them, the Santa Claus rally is one of the strangest, yet it’s also discussed in the mainstream.

Recently, CNBC issued a report suggesting that the “large gains in November may steal from December’s rally.” And there’s a good reason for caution, with the S&P 500 up more than 11% at the time of the write-up’s publication. According to Sam Stovall, chief investment strategist at CFRA, “If it’s up more than 10%, it will only be the third time since World War II that November has been up that much.”

Of course, nobody wants to hold the bag, even with names that are considered the best stocks to buy for December. Therefore, the Santa Claus rally may not be as robust this year. But what exactly is this phenomenon?

Generally speaking, the Santa Claus rally is the supposed tendency of equities to rise during the last week of the year up through the early sessions of the new year. For our purposes, I will take the traditional definition: the profit (or loss) of a particular index or security from the session after Christmas through the second trading day of the following year.

Utilizing this framework for the Dow Jones Industrial Average, the phenomenon may have some valid basis. However, you may be surprised to learn that the Santa Claus rally has been more profitable in decades past. As the market entered the modern era, average returns have declined. Additionally, in the last decade, buying the Santa rally has resulted in slight losses. So, does this mean this methodology is ineffective for finding the best stocks to buy?

Santa Claus rally
Click to Enlarge
Source: Chart by Josh Enomoto

Here’s my take on it – I wouldn’t buy something just because of the Santa Claus rally. More importantly, individual stocks respond differently to this phenomenon than benchmark indices. Still, the rally is an intriguing concept. Here are some of the best stocks to buy for December on this fascinating holiday trend.

  • McDonald’s (NYSE:MCD)
  • Disney (NYSE:DIS)
  • IBM (NYSE:IBM)
  • Merck & Co. (NYSE:MRK)
  • Amazon (NASDAQ:AMZN)
  • Target (NYSE:TGT)
  • Sociedad Quimica y Minera de Chile (NYSE:SQM)
  • Ford (NYSE:F)
  • Intel (NASDAQ:INTC)

On a last note before we get into it, you’ll notice that all the names above have a market history that extends at least 20 years. That’s by design so that we’re working with large data sets. Also, I’m going to stick closely with the Santa rally trend. Before you dive into these best stocks to buy, make sure to understand the full context behind the issuing companies.

McDonald’s (MCD)

MCD stock Santa Claus rally
Source: Chart by Josh Enomoto

At first glance, McDonald’s doesn’t scream at you as one of the best stocks to buy for December 2020, not with the novel coronavirus pandemic raging uncontrollably. However, you would be surprised at how much people are addicted to fast food. Every time I swing past a Mickey D’s, I see lines of cars waiting in the drive-thru lanes. It’s remarkable and it’s great news for MCD stock longer term.

As for how it responds in the last week of the year, it’s somewhat of a mixed bag. Since the 1960s, MCD stock averages a return of 0.75% utilizing the Santa Claus rally method. That’s not bad considering that McDonald’s is a blue-chip mainstay. Plus, we’re only talking about a period that extends less than two weeks.

However, it’s also interesting that McDonald’s shares waver from one decade to the next: there are never any consecutive positive or negative decades under Santa’s framework. Therefore, since last decade was in the red, it implies – if the pattern holds – that this decade should see more upside than down.

Disney (DIS)

DIS stock Santa Claus rally
Source: Chart by Josh Enomoto

Another blue-chip stalwart that has negative implications because of the coronavirus pandemic, Disney could use some love. Unlike McDonald’s, though, the underlying business of DIS stock isn’t visibly encouraging. According to media reports, the Magic Kingdom will increase the number of planned layoffs to 32,000 employees. That’s a staggering figure that ordinarily wouldn’t make Disney one of the best stocks to buy.

However, what does Saint Nicholas have to say about DIS stock? Remarkably, Disney is one of the most consistently strong Santa rally plays among blue chips, averaging 1.4% since the 1960s. Actually, this trend may not be that remarkable. When you think about Christmas and the winter holidays, Disney represents a key brand. Thus, there might be some quantifiable logic to this phenomenon after all!

To be fair, the last decade’s rally under the St. Nick methodology was limited, averaging only 0.58%. However, DIS has a tendency of bouncing strongly following a lackluster decade.

IBM (IBM)

IBM stock Santa Claus rally
Source: Chart by Josh Enomoto

Let’s face reality – IBM has seen better days. While one of the best stocks to buy in decades past, “Big Blue” encountered severe challenges as the nature of technology rapidly changed. However, you can’t keep a big alpha dog like IBM stock down forever. Forging ahead in a sector dominated by cloud computing and machine learning, this tech stalwart is surprisingly relevant.

Further, one of the legacies that it presently enjoys is that it remains one of the best stocks to buy for the Santa Claus rally. Since the 1960s, IBM stock averages 0.49% when you buy and sell around the last week of the year. That was still the case last decade, when it eked out an average of 0.42% despite it being a difficult one.

But what does the future hold for Big Blue moving forward? Personally, I think stakeholders can be encouraged as IBM dives into relevant businesses such as artificial intelligence and deep learning.

Merck & Co. (MRK)

MRK stock Santa Claus rally
Source: Chart by Josh Enomoto

Big pharmaceutical companies have encountered an interesting year in 2020. Take for example Merck & Co. Prior to the Covid-19 pandemic. MRK stock benefitted from its cancer treatment portfolio, backed by flagship drugs such as Keytruda. Then, the coronavirus made a rude interruption. Suddenly, very few people wanted to be in healthcare facilities anymore, hurting the narrative for Merck and its ilk.

However, when it comes to St. Nick’s rally, investors should be encouraged that Merck shares qualities similar to McDonald’s. Basically, decade-by-decade, MRK stock features an up-down motion. But on the upswing, the profits can be powerful. Over its lifetime, Merck averages 0.5% gains when deploying the target methodology.

Interestingly, the last decade got stuffed with coal from the jolly old fat man. And because Santa has multiple preexisting conditions, I’m not entire sure if this year will feature a ramp-up for MRK stock. However, moving past the coronavirus disruption, Merck should turn out to be one of the best stocks to buy for the long haul.

Amazon (AMZN)

AMZN stock Santa Claus rally
Source: Chart by Josh Enomoto

Amazon needs no explanation. This is one of the best stocks to buy, period. It’s not just that AMZN stock is levered to the e-commerce revolution. Rather, the underlying company is the ultimate disrupter, changing the rules for whatever game it wants to play. Of course, this doesn’t endear the brand to small businesses. But like some Fox News pundits might say, it’s nothing personal, it’s just capitalism.

And oh, what a capitalist Amazon is! Even when you consider its role as a Santa Claus play, AMZN stock absolutely trounces the competition. In its relatively young lifetime, Amazon averages 2.3% utilizing this methodology. Still, you might notice that the trend by decade is declining sharply. Should current prospective buyers be worried?

As I mentioned earlier, you shouldn’t buy any company simply based on one metric. Certainly, you wouldn’t do it on a calendar phenomenon like this. However, AMZN could bounce back sharply this decade due to the surge in demand for contactless services.

Target (TGT)

TGT stock Santa Claus rally
Source: Chart by Josh Enomoto

If you want best stocks to buy with proven resilience, you may want to check out Target. As Amazon and other e-commerce platforms began encroaching on the very idea of physical retailers, Target’s business came under scrutiny. However, the company has responded with new business initiatives such as groceries and most importantly, ship-from-store deliveries.

Historically, then, TGT stock offers Santa Claus rally performances that are biased toward prior decades before e-commerce began spreading at scale. Over its lifetime, shares average 1.63%, backed by outstanding figures during the 1990s and 2000s decades. However, last decade, the St. Nick rally produced a measly 0.08% — not worth the time to even consider the methodology.

Nevertheless, TGT stock has performed very well during the pandemic, up 36% year-to-date at time of writing. Once the pandemic fades, its one-stop-shop business should represent a strong catalyst. As well, I’ve personally found its ship-from-store business to be quick and reliable.

Sociedad Quimica y Minera de Chile (SQM)

SQM stock Santa Claus rally
Source: Chart by Josh Enomoto

As you know, electric vehicles have been all the rage this year. Perhaps you’ve even made the transition yourself. Given the pandemic’s disruption to the global auto supply chain, EVs offer a sizable measure of insulation. But it’s hard to figure out which EV companies offer the best stocks to buy. Therefore, investors may want to check out Sociedad Quimica y Minera de Chile instead.

Because of its underlying lithium mining business, SQM stock offers plenty of potential. Thus, I wouldn’t get hung up on the declining trend of its Santa Claus rally. Yes, on average, shares have a lifetime performance gain of 2.17%, which actually makes it one of the best stocks to buy on this phenomenon alone. Last decade, however, the performance dipped to a paltry 0.36%.

But EVs have become mainstream and many more people are likely to make the transition. Further, electric infrastructure will improve, making the transition considerably easier. So, you can probably buy SQM stock with confidence.

Ford (F)

F stock Santa Claus rally
Source: Chart by Josh Enomoto

For me, Ford is one of the intriguing ideas for best stocks to buy based on the Santa Claus rally. During its heyday, the iconic American automotive giant was emblematic of our nation’s manufacturing prowess. However, foreign competition combined with internal missteps contributed to making F stock a shaky investment.

But if you were to buy shares based on St. Nick’s methodology, you’d generally leave with a smile on your face. Since the 1970s, F stock generated average returns of 0.81% on the rally – that’s really good considering its blue-chip nature. And I would also characterize last decade’s performance of 0.51% as solid.

Looking beyond the horizon, I’m bullish on Ford as the automaker makes its transition toward EVs. In my opinion, its Mustang Mach-E is gorgeous, taking design cues from contemporary luxury SUVs. More importantly, Ford offers the scale to present a true challenge to Tesla (NASDAQ:TSLA).

Intel (INTC)

INTC stock Santa Claus rally
Source: Chart by Josh Enomoto

Out of the best stocks to buy on this list, Intel is probably the most speculative. That’s because the chipmaker has suffered from a comedy of errors. Of course, this is no laughing matter if you’re a stakeholder of INTC stock. Further, it’s alarming the number of times management has led this premium brand down the wrong path.

On average, though, INTC stock doesn’t look terrible under the Santa Claus rally’s framework. Lifetime, shares are looking at an upside performance of 0.55%. However, this would ignore the fact that INTC dipped 1% in the previous decade. This includes five consecutive Santa rally failures between 2014 through 2018.

But is that the final word on Intel? While the mistakes have been horribly embarrassing, I believe Intel could have similar traits to IBM: you can’t keep down a dominant player for too long. If you don’t mind some turbulence, INTC may offer contrarian upside.

On the date of publication, Josh Enomoto held a long position in F stock.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.


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