The January Effect 2005

For a good deal more background on the "January Effect", check out our summary of stock behavior in the month of January, particularly toward the bottom of the page.  There, you'll find that the "January Effect" actually has quite a few different definitions, depending on which market guru you listen to.

Here, we'll focus on the January effects that refer to yearlong losers and cheap stocks.  Below, we offer a table of stocks that fall into each category, sorted according to "cheapness" and "losingness".  The stocks are pulled from the Russell 3000 index, so they've already passed a certain standard of quality.  We then go on to choose a handful of stocks in these two lists for which we have particular fondness.  To be perfectly clear, these stocks should be viewed as candidates for gains in January, particularly the first half of January (last year we saw a number of cheap stocks exhibit extreme gains in the first half of the month, and level off or lose after that).

The Group of Cheap Stocks

The stocks listed as "cheap stocks" range in price from about $1.10 to $3.70.  A good chunk of them come from the computer technology group.  Biotechs and a number of retails are also featured.

We've made mention of several of these stocks before.  Last year, we offered a brief profile of Oplink (oplk) in our January report, and mentioned JDS Uniphase (jdsu) as a candidate as well.  Oplink  moved from $2.39 to $3.14 in the first few weeks of January, and settled back to earth thereafter.  Then there's Infonet (in), again profiled last year in our January report.  The stock moved from $1.68 to $2.12 in January of 2004.  These stocks could well take off again, but we won't profile them twice.  

Looking at the list of cheap stocks, there seem to be a higher proportion of companies with decent fundamentals than in years past.  That's not to say you'll find any of these on Warren Buffett's shopping list for the new year, but a good deal of them have decent revenues, profits, cash holdings, book values, etc.  We don't see many that are immediate candidates for bankruptcy (Rite-Aid, rad, stands out as an exception though, with monstrous debt)..

The companies below were selected for their fundamentals.  Most likely, fundamentally sound stocks won't perform any better or worse in January than their junkier brethren, but the idea here is simply to find stocks you wouldn't necessarily be afraid to "get stuck" with.

Repligen (rgen)

Here's a cheapo biotech, currently going for $2.37.  The company has been kicking around for quite awhile without launching any major drugs, but somehow has managed to retain $20 million in cash without any debt to speak of, and no massive dilution (30 million shares currently trade).  For what it's worth, the company has a history of performing quite nicely in the month of January.

The company does realize some revenues (around $5 million/year) by selling a number of products that are useful in biotech laboratories.  Drugs for anxiety disorders, schizophrenia, and other mental illnesses are in early (phase I/II) testing.

The intriguing thing here is the "relationship" with drug giant Bristol Myers Squibb.  Bristol Myers owns the rights to a formulation of a promising arthritis drug, CTLA4, which it calls "Abatacept".  The drug has already passed through a phase III trial, with very significant clinical results...not only does the drug appear to work, but its mechanism of action is novel, meaning that the drug might be used in combination with other existing drugs for an even more potent effect.  Repligen, given its relationship with the original developers of the drug (the University of Michigan) unsuccessfully sued Bristol Myers for this formulation.  While the company lost this particular suit, Repligen does indeed hold the patent for use of the drug in rheumatoid arthritis.

So the bet here is that a deal (most likely, for royalties) will be struck with Bristol Myers before too much longer.   Otherwise Bristol Myers would either be barred from selling the drug for arthritis or Repligen would use its remaining cash to launch a lawsuit for survival.  Given the whimsies of the legal system, nothing is sure, but a resolution would not be unprecedented, and is probably the most likely course of action.

Raytech (ray)

These guys manufacture a variety of products used in brake and transmissions in any number of on-road and off-road vehicles.  The company operates at a loss, but that loss has narrowed quite a bit in the last year to just a few million dollars.  Meanwhile, revenues have increased around 7% for the year to date...expect total revenues over $250 million for the year.  Debt/equity stands at .37...a very acceptable figure for this sort of industry, and the book value ($1.77/share) is just a tad under the stock price ($1.85).

The company is something of an oblique "China growth" play, as revenues from China and Asia have grown rapidly in the last few years, aided by a number of manufacturing facilities inside China.

Optical Communication Products (ocpi)

Like Oplink (oplk), a company we looked at last year, this company manufactures a range of devices used in optical network devices.  Like Oplink, the company has done a nice job of moving closer to profitability in the last year...revenues were up nearly 50% in the most recent fiscal year (ended last September), while losses fell 90% to a mere $1.3 million.

Emerson Radio (msn)

In addition to their well-known electronics products, the company also owns 53% of "Sports Supply Group", an operation that distributes and markets sporting goods.  

The stock hasn't taken a loss over the last year...in fact, it has gained a tad, based on increasing revenues (up 17% over the last six months) and income.  Debt/equity is a reasonable .35.  Despite the cheap stock price, the stock isn't particularly volatile...nevertheless, if the stock's performance parallels that of last January, you could walk away with 20% profits in a short time.

The List of Yearlong Losers

Naturally, there's a fair amount of overlap between the "cheapest" and "losingest" lists above.  Below, we've singled out a few companies that aren't extraordinarily cheap:  if they offer nice January bounces, it won't be related to the stock pricing.

Netflix (nflx)

This one has the distinction of being profiled as the "stupid investment pick of the week" at cbsmarketwatch.com a few weeks ago.  In actuality, the article (we won't offer a link...the address is likely to change...but you might be able to dig it up by looking for articles by the author, Chuck Jaffe) offered a mixed review of the stock.  One important point is that while the stock has lost close to 70% over the last year, at the current $12.90, it's still up a good deal from the $3 lows of late 2002, so it may not be the classic January effect pick.

The company sells DVD's via mail.  A number of negative events in the last year have added up to the large drop in stock price.  Just last month, the company announced that it will be lowering its month DVD subscription prices and offered lowered guidance for 2005, resulting in a one-day 41% loss.  Fidelity, a former large holder of the stock, has dumped large quantities.  Blockbuster Video's own rental service recently surpassed Netflix in customers.  Plenty of negative news.

Meanwhile, though, the company actually realizes profits!  Nine month revenues have nearly doubled, to the current $360 million (over the last nine months), and profits quadrupled, to better than $16 million.  That'll slow down next year, but with no debt and $170 million in cash, the company is certainly not in any danger of disappearing off the map anytime soon.

eSpeed (espd)

Here's an outfit that ought to be able to do something about their declining stock price.  In their own words, the company "develops and deploys interactive vertical electronic marketplaces and related trading technology that offers traders access to liquid, efficient and neutral financial markets."  Basically, these guys develop software and networks that help large exchanges (e.g. the Chicago Board of Trade) run efficient markets.

There's a lot to like about this company.  As a sample, check out this glowing review of the operation at the Motley Fool site.  The reason for the yearlong decline is a couple of lowered profit estimates, due mostly to increasing competition.  Still the company occupies a large chunk of its potential market, with a very clean balance sheet:  no debt, $220 million in cash, rising revenues (most recently, up 8% vs. the previous 9 months), and a projected p/e of 25 for the next fiscal year, despite the lowered expectations.

By the way, this company is a division of Cantor Fitzgerald.  You might recall that Cantor Fitzgerald was decimated by the 9/11 disaster...these guys have done a nice job of pulling their operation back together since then.

PMC-Sierra (pmcs)

Semiconductors have taken a bit of a beating over the last year, and these guys have received more than an average helping of that punishment...down about 45% for the year.  This company is actually a fairly large semiconductor manufacturer, making nearly 200 different devices for hard drives, networking, ISP's, and more.  Market capitalization is nearly $2 billion.

As with eSpeed above, the stock price has suffered because of declining earnings forecasts.  And as with eSpeed, the company revenues and profits have actually risen in the last year, and debt is not excessive (a 0.25 debt/equity ratio).  The projected p/e for next year is, however, a rather lofty 75.

Historically, semiconductors have fared quite well in January.  Given the yearlong losses, the company might pack even more punch if January unfolds in a historically typical fashion.

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