The January Effect

You've undoubtedly heard of the "January Effect," the phenomenon that seemingly causes stocks, particularly small caps, to surge in the month of January. The theory is that investors and institutions sell in December for tax-harvesting reasons, and buy back the following month, causing them to jump in price.

Whatever the reason, it's certainly not a way Fools would advocate you invest. As Foolish colleague Selena Maranjian once noted, you could accurately predict how the market will react by following butter production in Bangladesh. Back-testing and data mining will let us find just about any causal relationship if we search hard enough.

A season for everything
Yet sometimes stocks do perform better at certain times. Retailers, for example, have seasons that are better-performing than others simply because of the nature of the business. Wouldn't it be great to know ahead of time which stocks performed best when? Now you can!

On Motley Fool CAPS, more than 80,000 investors have sized up the potential of more than 5,300 stocks. Those they think have the best potential for beating the market are assigned five-star ratings. We'll rummage through them, then pair our findings with data going as far back as five years to check out in which month they perform best. Below are five companies that have historically done best in January.

To what can we attribute the stellar January performance of online Chinese gaming company GigaMedia? It's an anomaly, especially when you consider that December happens to be the worst month for GigaMedia's stock, when its price drops an average of more than 3%. That's why we don't recommend using this as a list of stocks to buy or sell, but as a platform for further research. Yet the CAPS community believes GigaMedia has big potential to continue outperforming the market.

Gaming revenue doubled in the third quarter, driven by a 72% rise in poker and casino software. Its online mahjong game site is the leader in terms of revenue. An exclusive deal with Electronic Arts (Nasdaq: ERTS) provides players with an online basketball platform, putting investors in prime position to profit.

CAPS special effects
More than 1,500 investors have rated the Motley Fool Global Gains recommendation, and 97% rate it an outperform. And it's almost unanimous among the nearly 500 CAPS All-Stars, those investors who consistently perform better than their peers over time.

When top-rated All-Star darkgoody gave GigaMedia the thumbs-up in November, he liked not only the business prospects but the company's fundamentals as well. Although the valuations are slightly different today, the reasoning behind this bull pitch is still intact:

I just reupped on this stock after the dip. Some fools post that GIGM is overvalued and part of the China bubble. The stock's had a huge run-up lately and there will probably continue to be a lot of volatility in the short term as investors sort this one out, which should provide plenty more good buying opportunities, but keep in mind that the P/E and PEG ratios ... are still very reasonable. Unlike some of the China stocks, this stock isn't trading at insane P/E multiples, and the company's business units are diversified across regions.

A few strengths for fools to chew on:

1) The company's European poker site nearly doubled revenue year-over-year
2) 68 million subscriber base. Services in 15 languages
3) pay Mahjong came online in Q2 of this year. HUGE potential in China
4) The company is adding cell phone gambling services
5) A more stable regulatory environment than U.S. Internet gambling businesses

GIGM is very likely to exceed earnings guidance in the coming quarters. I'd wait for another dip to buy in, but I think this company's a multi-bagger over the next five years.

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 regardless of which month it is. Since it's free to sign up and post your thoughts, why not use this opportunity to take your star turn?