January Roulette Under Way

This article is from the archive of The New York Sun before the launch of its new website in 2022. The Sun has neither altered nor updated such articles but will seek to correct any errors, mis-categorizations or other problems introduced during transfer.

The New York Sun

In the Marines, there’s an old saying – No guts, no glory! Of course, many glory seekers often die in the process.


This could well apply to those investors who take a fling in Wall Street’s January effect, a yearly market event, rife with risk, where the aim is to make a fast buck on small, highly speculative, beaten-up stocks. This money-making game, which is already in its early kickoff stage this year, is not an easy one to play since it’s attracting growing hordes of the country’s savviest stock traders.


To participate, it would almost be like trying your hand at one of those multimillion-dollar poker tournaments, which would pit you against the world’s best poker players, and where big bucks can be won and lost in the blink of an eye.


In brief, January is the month when many peewee stocks traditionally rebound after being battered by year-end tax-loss selling (the period in which stock players write off their losses, often in smaller companies, against their winners to minimize their tax bite).


Accordingly, if you’re willing to flirt with financial danger, the time to start thinking about buying those beaten-up small fries is now.


Small stocks, given their reduced liquidity, are obviously more vulnerable to the abnormal selling pressures created when investors rush to book tax losses before year-end. So when tax-loss selling abates in January, the bloodied smaller stocks tend to rally and outperform their larger rivals.


History tells the story. For starters, January ranks among the best months for American stocks over the past 50 years, and small company stocks have handily outperformed large stocks in January.


As one trader put it, “you’re buying dogs and hoping they haven’t lost their ability to bark.”


The idea of capitalizing on the January effect is hardly new. Academics have been publishing papers on it since the mid-1970s.The problem is, as more traders get into the act, exploiting the effect has become more difficult. Indicative of this,the small company Russell 2000 index has underperformed the large company S&P 500 in 11 of the past 18 Januarys.


To some observers, this showing might suggest the January effect has gone by the boards. Not so, says Richard Moroney, editor of Upside, a monthly newsletter in Hammond, Ind., with a better than average record of picking winning smaller stocks. He believes the increased trading aimed at capitalizing on this phenomenon may have simply pushed the January effect forward.


Supporting this view, in the twomonth period ending December 31, the Russell 2000 has outperformed the S &P 500 in 12 of the past 18 years, including five of the last six. From 2001 through 2004, the Russell index shows an average annual gain of 8.4%, versus a 5.2% yearly rise for the S&P 500. Last year, the Russell Index glittered even more, climbing 11.6% in the twomonth period, compared to a 5.2% gain for the S&P 500.


Okay, let’s say you’d like to take a shot at utilizing the January effect. What’s the smartest way to do it? And which stocks are the best bets?


For starters, Mr. Moroney says candidates should be screened for the following characteristics:


* A market capitalization of less than $250 million.


* A current price of less than one-half the 52-week high.


* A current price of at least 15% above the 52-week low.


* A quick ratio (current assets plus receivables divided by current liabilities) greater than 2-to-1.


* Long-term debt as a percentage of total capital below 15%


* Positive income from continuing operations over the past 12 months.


Here are 10 speculative stocks (plus their current prices) that Mr. Moroney says meet these criteria. Because of their speculative nature, he suggests investors buy a portfolio of all 10, rather than just one or two. Likewise, he emphasizes that all of them – which he describes as “in the bargain bin” – should be sold by January 9, 2006, whether they are up or down.


The 10: Amarin ($1.10); China Energy Savings Technology ($4.22); Interchange Corporation ($6.16); Law Enforcement Associates ($1.78); NMS Communications ($3.41); United American Healthcare ($2.74); Escalon Medical ($5.36); Magellan Petroleum ($1.64); Arrhythmia Research Technology ($10.94), and PDI ($12.99).


The New York Sun

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