Interesting article on the January effect I spotted in the Richmond Times-Dispatch. Also mentions how PMCS was one of the best-performing stocks in the S&P 500 for 2003, up 262%.
This year the January effect forgot to show up
STOCK PICKS
JOHN DORFMAN
The stock market's famed January effect is partly missing in action this year.
The January effect is really the confluence of three separate patterns. Stocks in general tend to do well in January. Small stocks tend to spurt ahead of large ones. And the previous year's losers often revive with a satisfying "January rebound."
The first two tendencies are present this year. The third is absent, a galling event for investors like me who like to play the rebound.
For this column I looked at how 2003's best and worst performers within the Standard & Poor's 500 index have done so far this year (through Jan. 16).
Most years I see a crisscross pattern. The previous year's winners usually cool off in January. The previous year's losers often roar back.
Not this year. The top 10 performers in the S&P 500 in 2003 are up an additional 14 percent in the first half of January. The worst 10 performers are up only 1.2 percent. The S&P 500 as a whole is up 2.5 percent, so last year's winners have outperformed the index and last year's losers have under-performed.
What gives? I'm not sure, but here are a few possible explanations:
Momentum investing is popular these days, so people are continuing to ride last year's winners.
Many of 2003's winners were technology stocks, and the tech sector is still showing earnings momentum.
Aware of the January rebound phenomenon, investors have learned to play it in advance. That robs January of its traditional role as host to a rebound in depressed stocks.
The bear market of 2000-2002 might have changed the tax equation that usually powers the January effect.
Let me explain the last point a little. One explanation for the January rebound in depressed stocks is that investors tend to sell these stocks in the fourth quarter to record tax losses.
Kicked by tax-motivated selling while they are already down, such stocks are often depressed below their true worth. When January comes, investors scent a bargain and begin buying the stocks they disdained a couple of months earlier.
That's the theory, anyway. And it has always made sense to me, even though I don't believe it is the whole answer. (The stock market shows a January effect in many countries, some of which have tax codes different from that of the United States.)
It's possible that many investors already had so many tax losses from the long bear market of 2000-2002 that they didn't want or need any more. If so, there might have been less tax-related selling in fourth-quarter 2003 than usual, and hence less fuel for a January bounce-back.
My little study definitely supports the idea that investors jumped the gun and staged a January-style rebound in December. The 10 worst losers for 2003 within the S&P 500 gained 7.6 percent in December, compared with 5.3 percent for the index as a whole.
The best gainers for 2003 in the S&P 500 were Avaya Inc. (AV), up 428 percent; Williams Cos. (WMB), up 264 percent; Dynegy Inc. (DYN), up 263 percent; PMC-Sierra Inc. (PMCS), up 262 percent; and Corning Inc. (GLW) up 215 percent.
Next best were Novell Inc. (NOVL), up 215 percent); AES Corp. (AES), up 213 percent; Sanmina-SCI Corp. (SANM), up 181 percent; Yahoo Inc. (YHOO), up 176 percent; and U.S. Steel Corp. (X), up 176 percent. These figures don't include dividends.
The S&P 500 as a whole, again without dividends, was up 26 percent.
Five of the 10 winners were technology stocks. I don't own any of them, and find most of them unsuitable for my investment approach. Avaya, for example, sells for 51 times estimated fiscal 2004 earnings and 34 times book value (corporate net worth). Its debt is 476 percent of stockholders' equity.
Unlike most of the investing public, I'm not sold on the technology sector as an investment for the next year or two. Take Novell, for example. It earned a total of five cents a share in the fiscal year that ended in October. Analysts are guessing 21 cents a share for the current fiscal year.
Compare that with the 90 cents a share Novell earned in 1995, or the 51 cents a share it made in 1999. The stock is still at some remove from its glory days.
The worst losers in the S&P 500 in 2003 were Winn-Dixie Stores Inc. (WIN), down 35 percent; Eastman Kodak Co. (EK), down 26 percent; Newell Rubbermaid Inc. (NWL), down 25 percent; AT&T Corp. (T), down 22 percent; and Schering-Plough Corp. (SGP), down 22 percent.
Almost as beaten up were Kohls Corp. (KSS), down 20 percent; DTE Energy Co. (DTE), down 15 percent; Merck & Co. (MRK), down 14 percent; Qwest Communications International Inc. (Q), down 14 percent; and King Pharmaceuticals Inc. (KG), down 11 percent.
Being a value investor and a contrarian, I own none of the 10 winners and three of the 10 losers. I hold shares in Winn-Dixie at 9 times earnings, Eastman Kodak at 11 times earnings and Merck at 14 times earnings.
John Dorfman, president of Dorfman Investments in Boston, is a columnist for Bloomberg News. The opinions expressed are his own. His firm or its clients may own or trade investments discussed in this column.
