The January Effect

Undoubtedly you've 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 them 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 my 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 can allow us to find out just about any causal relationship we want 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 81,000 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 5-star ratings. We'll pair this rating score with data going as far back as five years to check out in which month some companies perform best. Below are five companies that do best in January.

To what can we attribute the stellar January performance of student loan servicing company First Marblehead? More than likely, it's an anomaly, much as December happens to be the worst month to hold First Marblehead's stock. It has typically fallen 20% during that month. 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 whatever the reason, the CAPS community believes the potential is significant for it to continue outperforming the market.

This has been an ugly month for many stocks so far, but even with the month already half over for most of these January standouts, there's still time to turn the tide here.

First Marblehead's stock was sent to the back of the class last month when CEO Jack Kopnisky announced that not only would the company not securitize any loans in the quarter -- or into the foreseeable future -- but it would also slash its dividend nearly in half. The private student loan provider receives revenues from bundling up the loans and selling them to investors. However, with the credit markets in as dire straits as they are, the market for them is not favorable.

CAPS special effects
More than 2,800 investors have rated the Motley Fool Hidden Gems recommendation, and 96% rate it an outperform. A number of CAPS investors, like potsticker, believe the investment thesis underlying First Marblehead remains intact, particularly in light of Goldman Sachs (NYSE: GS) stepping forward and providing it with $1 billion in debt financing.

People will continue to need student loans. In more difficult times, lenders will want more information regarding the appropriate rate setting. FMD's experience and data will not become obsolete as quickly as the market has priced. Goldman Sach's investment in FMD seems to have supported this conclusion that a profitable business still exists.

CAPS All-Star slbutton sees the long-term potential for First Marblehead, even if the near term is a bumpy ride. Plus, having the company of some excellent investing minds allows for a more peaceful ownership experience.

I've owned and followed First Marblehead for several years now ... In recent days I've been concerned about whether the company will survive, and how profitable it will be. I sat down and worked up some numbers for worst case and optimistic scenarios... I think things might get worse in the short term, but that in the long term FMD will resume the lucrative securitization of student loans... I don't attach as much importance to insider ownership as the [Hidden Gems] crowd does ... but knowing management has a 30% stake in the business and that Bill Mann, Philip Durrell, and Goldman Sachs all saw value here helps me sleep a little easier.

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?