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6 Stocks to Profit From the "January Effect"

Swarup Gupta

Stocks posted back-to-back gains on Jan 7, igniting hopes that a revival is in the works after the most dismal December since the Great Depression. This was in keeping with the historical phenomenon known as the January Effect. This is a direct result of investors selling stocks at the end of a year in order to offset capital gains, only to redeploy funds obtained from these sales at the start of the New Year.

Tech stocks, the darlings of the bourses till last year, seem to have found fresh favor with investors. This is evident from the interest shown in Netflix’s NFLX stock, which is recovering from a dismal second half of last year. Meanwhile, bullish jobs data and trade talks are boosting retail stocks. Investing in tech and retail would enable you to make the most of this January Effect.

Understanding the January Effect

To correctly understand this phenomenon, it is necessary to examine December’s stock rout more closely. The majority of market watchers have ascribed these losses to President Trump’s tweets and his protectionist trade policies. However, one factor that has been largely ignored is tax selling.

According to DataTrek Research co-founder Nicholas Colas, this tax fueled sell off will lead to a rebound in January. This is because when fund managers are face falling stock prices, they don’t just sell winners to reap profits. Some losers are also sold to offset the increase in tax liability caused by capital gains.

Colas thinks this sort of tax selling did occur in December. The sales proceeds are now being reinvested in equity markets, leading to gains in January. According to Matrixtrade.com’s Ed Matts the S&P 500 has gained 1.8% on average in January since 1950. This is substantially better than the average increase of 0.7% recorded for other months.

Can Positives Outweigh Negatives This Month?

There is some evidence to show that the influence of this effect has declined since it was discovered in 1976. At the same time, a good January for stocks has a strong correlation with strong annual performance in the months to follow. Matts puts its correlation coefficient at 0.25, which is significantly strong, while it is only 0.016 for other months.

Ultimately, it is important to evaluate the factors at play at this point in order to determine whether the January Effect will come true this time around. A long and bruising trade war with China and a partial government shutdown are the major negatives confronting investors this month.

However, progress is more than evident on the trade talk front with China’s vice premier Liu He attending negotiations with top U.S. officials on Jan 7. Strong jobs’ numbers are providing fresh evidence that the U.S. economy remains robust, boosting retail stocks in the process.

And tech stocks, which had fallen out of favor with investors, are rebounding.  The likes of NVIDIA NVDA, Twitter TWTR, Amazon AMZN and salesforce.com CRM gained 5.3%, 4.6%, 3.4% and 3.1%, respectively, on Jan 7.  

Our Choices

Market watchers think that the gains recently experienced by stocks can be ascribed to a historical phenomenon called the January Effect. As a result, tech stocks have once again found favor with investors. Retailer stocks are also witnessing gains, also boosted by a bullish jobs report.

Investing in tech and retail would enable you to reap maximum benefits from the January effect this year. However, picking winning stocks may be difficult.

This is where our VGM Score comes in. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners. However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM Score. 

We have narrowed down our search to the following stocks, each of which has a Zacks Rank #1 (Strong Buy) and a good VGM Score. You can see the complete list of today’s Zacks #1 Rank stocks here.

Dell Technologies Inc. DELL is a designer, developer, manufacturer and seller of information technology products and services.

Dell Technologies has a VGM Score of A. The company’s projected growth rate for the current year is 1%. The Zacks Consensus Estimate for the current year has improved by 2.1% over the last 30 days.   

Marvell Technology Group Ltd. MRVL is a fabless designer, developer and marketer of analog, mixed-signal and digital signal processing integrated circuits.

Marvell Technology has a VGM Score of B. The company’s projected growth rate for the current year is 4.8%. The Zacks Consensus Estimate for the current year has improved by 7.8% over the last 30 days. 

Verint Systems Inc. VRNT is a leading provider of analytic solutions for communications interception, digital video security and surveillance, and enterprise business intelligence.

Verint Systems has a VGM Score of B. The company’s projected growth rate for the current year is 12.9%. The Zacks Consensus Estimate for the current year has improved by 2.3% over the last 30 days. 

RH RH is a leading luxury retailer in the home furnishing space.

RH has a VGM Score of A. The company’s projected growth rate for the current year is more than 100%.

Abercrombie & Fitch Co. ANF is a specialty retailer operating through two segments, Hollister and Abercrombie.

Abercrombie & Fitch has a VGM Score of B. The company’s projected growth rate for the current year is 42.2%. The Zacks Consensus Estimate for the current year has improved by 1.1% over the last 30 days. 

BJ's Restaurants, Inc. BJRI owns and operates a chain of 200 high-end casual dining restaurants in the United States (as of Jul 3, 2018).

BJ's Restaurants has a VGM Score of B. The company’s projected growth rate for the current year is 3.2%. The Zacks Consensus Estimate for the current year has improved by 1.3% over the last 60 days.   

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Amazon.com, Inc. (AMZN) : Free Stock Analysis Report
 
Netflix, Inc. (NFLX) : Free Stock Analysis Report
 
Twitter, Inc. (TWTR) : Free Stock Analysis Report
 
Marvell Technology Group Ltd. (MRVL) : Free Stock Analysis Report
 
Dell Technologies Inc. (DELL) : Free Stock Analysis Report
 
Verint Systems Inc. (VRNT) : Free Stock Analysis Report
 
salesforce.com, inc. (CRM) : Free Stock Analysis Report
 
Abercrombie & Fitch Company (ANF) : Free Stock Analysis Report
 
BJ's Restaurants, Inc. (BJRI) : Free Stock Analysis Report
 
Restoration Hardware Holdings Inc. (RH) : Free Stock Analysis Report
 
NVIDIA Corporation (NVDA) : Free Stock Analysis Report
 
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