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Last year I
presented a basket of stocks we believed were trading below value as a result of the January Effect. As Motley Fool
pointed out, “if you’d bought a share in each company she suggested at the first ring of the opening bell this January, you’d be sitting on 27% gains for the year.” With this in mind, we present another list constructed with the same screening process.
Background: What is the January Effect
As discussed last year: The January effect is a phenomenon that makes prices of certain stocks rise more in January than the market averages. Two events theoretically cause the January effect: Firstly, at year’s end, investors sell losing stocks to better their tax returns. (Related:
Should Facebook Be a Tax-Loss Sale?) 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.
Investing Ideas for 2013
By using the same criteria for the 2012 list, we recreated a 2013 list of stocks that may rebound in the New Year.
We started with a universe of 185 stocks that have seen significant losses over the last year (at least -10%), in addition to accelerating losses over the last month (at least -5%).
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.