The January Effect

You've probably heard of the "January Effect." This phenomenon seemingly causes stocks, particularly small caps, to surge in the first month of each year. The theory holds that investors and institutions sell in December for tax-harvesting reasons, then buy their former holdings back the following month, causing them to jump in price.

Whatever the reason, it's certainly not a Foolish way to invest. As fellow Fool Selena Maranjian once noted, you could accurately predict how the market will react by following butter production in Bangladesh. Backtesting and data mining can allow us to discover nearly any causal relationship we want, provided we search hard enough.

A season for everything
Yet sometimes, stocks do perform better during certain periods. By the nature of their business, retails have best-performing and worst-performing seasons. Wouldn't it be great to know ahead of time which stocks performed best when? Well, now you can!

On Motley Fool CAPS, more than 82,000 investors have sized up the potential of more than 5,300 stocks, giving those with the brightest prospects a maximum five-star rating. We'll pair those top picks with data going as far back as five years, to see which month marks their best performance. Below are five companies that do best in January.

Stock

Market Cap

Avg. % Return-January

Avg. % Return-Rest of Year

CAPS Rating

YTD Return

Rambus (NASDAQ:RMBS)

$1.6 billion

37.95%

1.34%

**

(24.1%)

Candela (NASDAQ:CLZR)

$97.4 million

13.36%

1.42%

*

(26.4%)

Halliburton (NYSE:HAL)

$27.9 billion

8.94%

2.12%

****

(16.5%)

Blockbuster (NYSE:BBI)

$674.3 million

7.90%

-1.61%

*

(10.5%)

Corus Bankshares (NASDAQ:CORS)

$591.5 million

5.43%

0.01%

*

(1.3%)

Sources: America Online, Motley Fool CAPS.

How can we explain the generally stellar January performance of financial institution Corus? It's most likely an anomaly, much like August happens to be the worst month to own the stock; Corus has typically fallen more than 4.6% during that month. That's why we don't recommend using this as a list of stocks to buy or sell -- just a platform for further research. But whatever the reason, the CAPS community believes that each of these stocks has significant potential to outperform the market going forward.

This has been an ugly month for many stocks so far, and two of the listed companies that usually earn top returns this month have fallen hardest so far. Aesthetic laser maker Candela and chip designer Rambus have both lost about one-quarter of their shares' value this month. Yet with still a week to go in January, which (if any) of these early year standouts will turn the tide?

CAPS special effects
There's one bright spot to Corus Bankshares: It's fallen the least this month. With shares nearly breaking even for this January, it seems to stand the best chance of posting a gain. Although Corus provides typical consumer-banking fare, it also focuses its corporate banking products on commercial real estate ventures, primarily in California, Florida, and Las Vegas. These are some of the worst-hit housing areas, and even though commercial real estate has thus far been immune to the meltdown witnessed in residential real estate, cracks are starting to show.

According to data from Real Capital Analytics, as reported in The Wall Street Journal, sales of significant office properties plunged 55% to $7 billion in November. Major banks such as Wachovia (NYSE: WB  ) and Lehman Brothers (NYSE: LEH  ) hold large amounts of commercial mortgage-backed securities. At the end of last month, Lehman said that about half of the $79 billion in mortgages it holds are CMBS loans.

This weakening of the commercial markets could have short sellers betting that Corus shares will fall further. Roughly 67% of the bank's float is sold short, suggesting that investors foresee a tumble. But the high short interest has some CAPS players, like PViddy, thinking thinking that the high percentage of insider ownership can counterbalance the shorts. As PViddy pitched at the end of last year:

The Glickman family holds 30% of the shares. They haven't sold anything on the market this year. Other insiders are buying only, no selling. Company announced 5 million share repurchase program in October.

Most of the float has been sold short. Dividend is nearly 9%. The shorts have to pay that dividend to stay in their positions. How long before they start buying to cover?

Yes, they have condo loans in Florida. Even a worst case outcome there will not take this bank down. It is priced like it is going out of business, which it isn't.

A calming effect
But we haven't yet heard from you, and at Motley Fool CAPS, every investor's opinion counts. Your voice affects these stocks, whatever month the calendar may display. Since it's free to sign up and post your thoughts, why not use this opportunity to take your star turn?


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Related Tickers

9/14/2009 9:30 AM
CORS $0.20 Down +0.00 +0.00%
Corus Bankshares,… CAPS Rating: *
BLOKA.DL $0.19 Up +0.01 +0.00%
Blockbuster, Inc. CAPS Rating: *
CLZR $3.00 Down +0.00 +0.00%
Candela Corp CAPS Rating: No stars
HAL $67.47 Down -0.87 -1.27%
Halliburton CAPS Rating: ****
LEH $0.13 Down +0.00 +0.00%
Lehman Brothers Ho… CAPS Rating: *
RMBS $11.84 Down -0.05 -0.42%
Rambus, Inc. CAPS Rating: *
WB.DL2 $5.54 Down +0.00 +0.00%
Wachovia Corp CAPS Rating: **

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