If you're looking for a cheery reason to ring in the New Year, the "January effect" could be the very thing to keep you on your toes.
The January effect is a phenomenon that makes prices of certain stocks rise more in January than the market averages. It presents a unique money making opportunity for astute investors, says Nigam Arora of Market Watch.
How it works...
Two events theoretically cause the January effect: Firstly, at year's end, investors sell losing stocks to better their tax returns. The mass sell-off lowers prices of these loser stocks.
Secondly, come January, Wall Street professionals can expect to receive their long awaited bonuses. Bonus season puts a significant amount of money in the hands of individuals likely to invest in the market, and bargain hunters seek out depressed names, such as those sold off in December. The renewed demand theoretically brings the prices back up.
The casual investor can usually capitalize on this January effect by searching for and buying up depressed stocks in December and then selling, with proper timing, in January.
However this technique is not fool-proof. Arora himself claims to have lost money with this trick 15% of the time (success rate: 75%, broke even: 10%).
Arora also says the game is changing. "Thirty years ago, one could simply buy depressed stocks in the last week of December. Now that the phenomenon has become well known, the time to buy is in November."
Investing ideas
So, how do you go about finding stocks that might benefit from the January effect?
To create this list, we started with a universe of about 180 stocks that have seen significant losses over the last year, in addition to accelerating losses over the last month.
In other words, price action suggests that many of these stocks are being sold to harvest tax losses.
To refine the list, we collected data on insider buying, and identified a list of names that have seen significant buying from insider executives over the last year.
Theoretically, insiders know more about their businesses than anyone else, so if they're using their own money to buy the shares of their employers, you better pay close attention.
Recent price action suggests these names are being sold to harvest tax losses, and insiders seem to think these stocks are ready to benefit from the January effect -- do you agree?
List sorted by monthly performance. (Click here to access free, interactive tools to analyze these ideas.)
List compiled by Eben Esterhuizen, CFA:
1. GeoEye (Nasdaq: GEOY): Provides earth imagery and imagery information products, as well as image processing services to the United States and foreign government defense and intelligence organizations, domestic federal and foreign civil agencies, and commercial customers. The stock has lost 25.28% over the last month, and lost 40.36% over the last year. Over the last six months, insiders were net buyers of 810,000 shares, which represents about 4.07% of the company's 19.92M share float.
2. Sequenom (Nasdaq: SQNM): Provides products, services, diagnostic testing, applications, and genetic analysis products that translate the results of genomic science into solutions for biomedical research, translational research, molecular medicine applications, and agricultural and livestock research. The stock has lost 19.52% over the last month, and lost 45.11% over the last year. Over the last six months, insiders were net buyers of 32,850 shares, which represents about 0.04% of the company's 89.83M share float.
3. MannKind (Nasdaq: MNKD): Focuses on the discovery, development, and commercialization of therapeutic products for diabetes and cancer. The stock has lost 17.04% over the last month, and lost 46.29% over the last year. Over the last six months, insiders were net buyers of 3,478,136 shares, which represents about 4.69% of the company's 74.22M share float.
4. Jefferies Group (NYSE: JEF): Operates as a securities and investment banking company in the Americas, Europe, and Asia. The stock has lost 15% over the last month, and lost 55.61% over the last year. Over the last six months, insiders were net buyers of 766,000 shares, which represents about 0.36% of the company's 213.56M share float.
5. Overseas Shipholding Group (NYSE: OSG): Engages in the ocean transportation of crude oil and petroleum products. The stock has lost 6.45% over the last month, and lost 58.05% over the last year. Over the last six months, insiders were net buyers of 73,682 shares, which represents about 0.31% of the company's 23.43M share float.
6. Vantage Drilling (NYSE: VTG): Provides offshore contract drilling services to large multinational oil and natural gas companies, government owned oil and natural gas companies, and independent oil and natural gas producers in the United States and internationally. The stock has lost 6.20% over the last month, and lost 30.86% over the last year. Over the last six months, insiders were net buyers of 5,350,210 shares, which represents about 3.22% of the company's 165.97M share float.
7. Pacific Capital Bancorp (Nasdaq: PCBC): Provides a range of commercial and consumer banking services to households, professionals, and businesses primarily in the central coast of California. The stock has lost 5.55% over the last month, and lost 53.11% over the last year. Over the last six months, insiders were net buyers of 3,495,414 shares, which represents about 85.67% of the company's 4.08M share float.
8. Fortress Investment Group (NYSE: FIG): Fortress Investment Group LLC is a public investment firm specializing in investments in debt and equity securities of public and privately held companies. The stock has lost 2.83% over the last month, and lost 32.75% over the last year. Over the last six months, insiders were net buyers of 60,000 shares, which represents about 0.03% of the company's 182.14M share float.
9. American International Group (NYSE: AIG): The company operates property and casualty insurance networks worldwide and conducts activities in the U.S. life insurance and retirement services industry. The stock has lost 2.57% over the last month, and lost 35.01% over the last year. Over the last six months, insiders were net buyers of 6,982,680 shares, which represents about 2.87% of the company's 243.61M share float.
10. Griffon (NYSE: GFF): Operates as a manufacturing company. The stock has lost 1.55% over the last month, and lost 34.08% over the last year. Over the last six months, insiders were net buyers of 14,000 shares, which represents about 0.02% of the company's 57.64M share float.
Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.
Kapitall's Eben Esterhuizen and Rebecca Lipman do not own any of the shares mentioned above. Insider data sourced from Yahoo! Finance.
