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Will These Stocks Win From the January Effect?

Brian Stoffel
January 10, 2011

What does Conan O'Brien have in common with small-cap stocks during December? Both were punished unfairly. O'Brien, with his awesome red pompadour, worked the late-night circuit for 16 years to get a shot at the big time. In the end, his Tonight Show stint lasted a paltry seven months, as he refused to let execs move his time slot past midnight to make room for Jay Leno.

In the world of investing, the same thing occasionally happens to small-cap stocks around the end of the tax year. In investing guru Peter Lynch's Beating the Street, he described a phenomenon he termed the January Effect. "You could make a nice living buying stocks from the low list in November and December during the tax-selling period, and then holding them through January, when prices always seem to rebound. This January effect ... is especially powerful with smaller companies," Lynch said.

Small-cap losers
With that in mind, I kept my eye open for small-cap stocks with market caps between $250 million and $1 billion that fell at least 15% during the last four weeks of 2010. The list below includes some of those companies.


Market Cap
(in Millions)

Stock Price Change, Last 4 Weeks of '10


CAMAC Energy (AMEX: CAK  ) 267.1 (35%) oil
Mesabi Trust (NYSE: MSB  ) 528.5 (27%) iron ore
OptionsXpress (Nasdaq: OXPS  ) 845.5 (18%) brokerage
Orion Marine (NYSE: ORN  ) 309.9 (22%) marine construction
Pain Therapeutics (Nasdaq: PTIE  ) 283.8 (15%) pharmaceutical
Sycamore Networks (Nasdaq: SCMR  ) 602.6 (18%) Internet networking

Source: Capital IQ, a division of Standard and Poor's.

Let's dig further to see if these stocks dropped for a good reason, or if they might stand to benefit from the January Effect.

Special dividends
Several of the companies on this list fell for a very good reason: They offered their shareholders large year-end dividends. OptionsXpress, Pain Therapeutics, and Sycamore Networks all paid special dividends amounting to 20% or more of their predividend share price. In theory, the stock price should have fallen by the same amount, which explains the declines.

Additional stock offering
When a company sells additional shares to the public at a discount, it dilutes the value of existing shares. That's what happened with CAMAC Energy, which offered 9.32 million shares in a public offering to raise money to improve a rig off the coast of Nigeria. The shares were sold at $2.20, a huge discount to the stock's pre-offering close of $2.64. After the announcement, the stock's price plunged more than 20% to below the $2.20 offering price. That makes the reason for CAMAC's drop pretty clear.

Lowered outlook
On Dec. 21, Orion Marin