End of Tax Season Throws Open Buying Opportunity: 5 Picks
We are aware of popular agendas like “Sell in May and go away”, the “January Effect” and the “January Barometer”, to name a few. These are closely-watched calendar trends when the market usually outperforms or underperforms in a given period of time.
These historical trends have some logical basis. For instance, markets rebound within two weeks of the Tax Day, which incidentally is on Apr 18 this year. This is because money flows into the market as more number of people start funding their Individual Retirement Accounts (IRA). Tax Day, thus, brings a seasonal investing opportunity, with some sectors historically performing well during this period.
Apr 18 is Tax Day this Year: Why?
Traditionally, Tax Day is observed on Apr 15. But, if the date falls on a Saturday or Sunday, the filing of federal income tax returns is pushed to the next business day. This means that tax day should have been on Monday, Apr 17 this year.
However, the Emancipation day holiday on Apr 17 has postponed the filing deadline this year. District of Columbia observes Emancipation day, which marks the freeing of slaves in Washington in 1892. This makes Apr 18 the deadline for filing taxes in the U.S.
Tax Day Market Trend
This also bodes well for the stock market. Estimates show that 15% to 33% of all tax filers wait till the very last date and eventually fund their IRAs. This results in additional money flowing into the markets. And why not? IRAs are like a basket of various asset classes, including stocks in which individuals invest their money for retirement.
The average daily gain, in the meanwhile, for the S&P 500 on the ‘Tax Day’ has been 0.3% in the last 10 years. A 0.3% gain in a day may not sound much, but, it is actually around 7 points on the S&P 500 index and equates to an annualized gain of about 75% over the average 252 trading days in a year.
In fact, the month of April, in terms of probability, is also one of the bullish months for the S&P 500. Over the past 10 and 5 years, the index has moved higher for about 90% and 80% of times this month, respectively.
The benchmark index, however, this time around is slightly down by 0.58%. So, this makes us believe that some sort of a rebound may take place during the rest of the month, which will eventually push the index into positive territory. Let us not forget that U.S. stocks have already ended a three session slide to close near session highs on Apr 17, with all the S&P 500 sectors moving north.
End of Tax Season to Boost Stocks
We also shouldn’t forget that the market, historically, tends to gain momentum in the two weeks following the Tax Day, with several sectors showing notable gains. On the other hand, stocks tend to remain flat or slightly down in the first two weeks of April.
According to data analytics firm Kensho, since 2000, the S&P 500 has been down on an average 0.2% in the first two weeks of April, while it was up 1.7% on an average during the two weeks following the Tax Day. That’s a swing of almost 2% on an average for the S&P 500, a significant gain for a two-week period.
Several sectors have also seen notable moves including technology, financials and industrials. The following table shows how these sectors performed in the month of April:
Sectors | First Two Weeks | Two Weeks After Tax Day | Average Swing |
Technology (April, Since 2000) | -1.1% | +2.2% | More than 3% |
Financials (April, Since 2000) | Flat | +1.7% | +1.7% |
Industrials (April, Since 2000) | Flat | +2.2% | +2.2% |
Play Tax Season with These 5 Stocks
Given that the aforementioned sectors are positioned to make the most of the upcoming bullish trend, investing in stocks from the same will be prudent. We have, thus, selected five such stocks that are fundamentally sound.
These stocks flaunt a Zacks Rank #1 (Strong Buy) or 2 (Buy) and a Growth Style Score of ‘A’ or ‘B’. Our Growth Style Score condenses all the essential metrics from a company’s financial statements to get a true sense of its quality and sustainability of growth.
Extreme Networks, Inc EXTR is a provider of network infrastructure equipment. The company has a Zacks Rank #1 and a Growth Score of ‘A’. The company is likely to return 73.8% this year, way higher than the Computer - Networking industry’s estimated gain of 9.5%. In the first two weeks of this month, however, it has yielded a negative return of around 4%.
Identiv Inc INVE is a security technology company. The company has a Zacks Rank #2 and a Growth Score of ‘A’. The company is likely to return 72.2% this year, way higher than the Computer - Peripheral Equipment industry’s projected increase of 7.4%. But, in the first two weeks of this month, the company has given a negative return of about 5%.
Health Insurance Innovations Inc HIIQ is a developer, distributor and cloud-based administrator of individual and family health insurance plans. The company sports a Zacks Rank #1 and a Growth Score of ‘A’. The company is likely to return 29.2% this year, higher than the Insurance - Life Insurance industry’s estimated gain of 11.3%. In the first two weeks of this month, however, it has given a negative return of around 3%. You can see the complete list of today’s Zacks #1 Rank stocks here.
Infinity Property and Casualty Corp. IPCC is a property and casualty insurer. The company has a Zacks Rank #1 and a Growth Score of ‘B’. The company is likely to return 18.2% this year, better than the Insurance - Property and Casualty industry’s expected gain of 10.1%. For the first two weeks of this month, the company has a slightly negative return of about 0.1%.
Global Brass and Copper Holdings Inc BRSS is a converter, fabricator, processor and distributor of specialized non-ferrous products, including a range of sheet, strip, foil, rod, tube and fabricated metal component products. The company has a Zacks Rank #2 and a Growth Score of ‘A’. The company is likely to return 25.2% this year, higher than the Metal Products - Procurement and Fabrication industry’s projected gain of 14.7%. In the first two weeks of this month, the company has given a negative return of around 6%.
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Extreme Networks, Inc. (EXTR): Free Stock Analysis Report
Identiv, Inc. (INVE): Free Stock Analysis Report
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Global Brass and Copper Holdings, Inc. (BRSS): Free Stock Analysis Report
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