Scott Olson
A trading strategy that's very popular among traders on Wall Street is to buy the worst-performing stocks of the year in the final days of December, hoping that these stocks will experience a monster rebound in the new year.
The idea here is that large money managers tend to dump their losers and take the tax losses in December to offset winning trades and reduce their reportable capital gains. This trading strategy is known as the January Effect, which is the tendency of equity prices to rise during the first month of the new year. The effect is most predominant for low-priced stocks, or stocks that trade under $10 a share.
These beaten-down low-priced names tend to rebound huge once the tax loss selling is done. This makes for some great trades if you're willing to understand that this is simply a trading strategy, and not an investment for the longer-term horizon. Market players should simply look to flip some extremely beaten-down low priced stocks into 2012. Traders should look for 20 per cent gains or more for some of the names I am going to present.
The key here is to use a strict trading discipline so that you don't get caught long these stocks if the January Effect never reaches them and they continue to downtrend. I will outline a trading plan for each name I present so you have an idea of how to time the trade.
All of the names I picked were among the top-percentage decliners in 2011. Basically, these are the worst-performing stocks on the planet. If we get any type of January Effect for equities that are trading under $10, then these names are as good as any. Hedge funds should rush into these names to coin some quick profits, so put them all on your trading radar.
Here's a look at a several low-priced stocks that could pop huge once tax-loss-related selling is over.
Motricity One January Effect candidate worth a look is Motricity , a provider of mobile data solutions and services that enable wireless carriers to deliver mobile data services to their subscribers. Motrictiy is the poster child for beaten-down stocks. It was trading as high as $23.09 in 2011 and now fetches just 90 cents a share. That's a total loss of 95 per cent so far in 2011 for MOTR.
This stock can't seem to stop going down. Shares of Motricity are printing new 52-week lows this morning as fund managers continue to dump this name due to its horrible performance in 2011. That said, this is one of the names that I think has the biggest upside if the January Effect takes holds since its one of the worst performers in 2011.
My trading plan for MOTR is to get long this stock at the first sign of a decent up day when volume is tracking in near or above its three-month average action of 776,708 shares. This is going to mean you're buying MOTR near its lows since the bounce has to come from somewhere in a stock that continues to print new 52-week lows. Watch for a trading session when the stock is ticking up in early trading and the volume is heavy. Make sure to use a mental stop that's just below the 52-week low once we get some high-volume strength.
The bounce in MOTR could be huge, maybe even over 100 per cent, since this stock is so beaten-down. This makes the risk-to-reward attractive for MOTR if we start to see any signs of life in this stock. This stock also has a huge short interest at 28.6 per cent of the tradable float. A monster short squeeze could kick off if the hedge funds pounce on this name for a January Effect play.
Sequans Communications Another January Effect candidate is Sequans Communications . This is a fabless designer, developer and supplier of fourth-generation semiconductor solutions for wireless broadband applications. The short-sellers have cleaned up on SQNS in 2011, with the stock off by over 73 per cent so far this year.
This stock once traded as high as $19.50, but since then, it has plunged to its current price of $2.19 a share. That's a massive drop for any equity, and it makes SQNS a great candidate for a January Effect play. This stock also has a low float, with 16.79 million shares and over 1.04 million of those shares sold short. That's more than enough bears to spark a decent short squeeze since the float is so small. Sequans also has $1.89 in cash per share on its balance sheet, which will help make this stock a more attractive play since it currently trades at around $2.19.
My trading plan for SQNS is to consider getting long if that recent low of $2.12 holds up in the next few days. If that low doesn't hold, then look for the first decent up day when volume is tracking in near or above its three-month average action of 476,930 shares. Look for any strength in this equity early in the morning where volume is tracking in strong. I would simply use a mental stop that's 10 per cent below your buy point.
If SQNS does see January Effect buying, then look for the stock to fill some of that large gap down from a few weeks ago. That could mean that SQNS has the chance to double form current levels.
Trident Microsystems Yet another January Effect play is semiconductor player Trident Microsystems , a provider of multimedia semiconductor solutions for the digital home entertainment market. This stock has been destroyed by the sellers in 2011, with shares off by 90 per cent. Trident traded as high as $1.99 in 2011, but that level is far removed from shares' current price of just18 cents.
This is another name that I think traders are going to find attractive for a January Effect play since Trident's total cash per share is 20 cents -- meaning it is currently trading below its cash per share value. Market players often consider any stock that trades near its cash per share value as ridiculously cheap. Shares of TRID are already ticking up 5.9 per cent today, and it's off its recent low of 15 cents, so that January Effect buying could be starting.
My trading plan for TRID is to get long off any weakness and simply place a mental stop 10 per cent below that recent low of 15 cents. If that low holds, then we could easily see Trident bounce huge from current levels if buyers step in. My target off any high-volume bounce is its 50-day moving average of 32 cents a share. Look for volume on any decent up day to track in near or above its three-month average action of about 1.1 million shares.
Hanwha SolarOne If you're looking for a beaten-down name in the solar sector that could be a great January Effect trade, then take a hard look at Hanwha SolarOne , a manufacturer of silicon ingots, photovoltaic cells and PV modules. It also provides PV cell processing services and PV module processing services. This stock is down huge in 2011, with shares off by over 88 per cent.
This stock is currently trading about 6 cents off its 52-week low of 99 cents. This is another beaten-down penny stock that has come all the way down from its 52-week high of $9.78 to its current level of $1.05 a share. This is another January Effect candidate with an extremely low float of just 22.28 million shares. The bears control 3.26 million of those shares through short positions. If the January Effect kicks in for HSOL, then this stock could easily experience a big short-squeeze.
My trading plan for HSOL is to buy the stock off any weakness and simply use a mental stop that's around 10 per cent below that recent low of 99 cents a share. You could also buy off strength and get long on a breakout over $1.15 a share on high volume. Look for volume on that breakout that's tracking in near or above its three-month average action of 858,961 shares. Target a run back toward the 50-day moving average of $1.66, or possibly even higher.
Sigma Designs One more trading idea for a January Effect play is Sigma Designs , a fabless provider of system-on-chip solutions, which are used to deliver multimedia entertainment throughout the home. The bears have hammered this stock in 2011, with shares off by a whopping 57 per cent.
This stock once traded as high as $15.02 a share, but it has since then dropped to a 52-week low of $5.68. Shares of SIGM are starting to show strength today with the stock hitting an intraday high of $6.06. It looks like the January Effect is already starting to show up for SIGM since buyers are stepping in despite the overall market weakness today.
My trading plan for SIGM is to buy this stock off any noticeable weakness and simply place a mental stop that's a few percentage points below that low of $5.68. If the stock closes up today and volume finishes near or above its three-month average action of 229,819 shares, then that would trigger a January Effect trade for me. My target on the upside is its 50-day moving average of 7.39 a share, or possibly much higher.
This stock has a decent short interest, with over 7 per cent of the tradable float currently sold short by the bears. These short bets could help to fuel a much larger move higher for SIGM if the January Effect buyers step into the stock in the near future.
Roberto Pedone is Senior Contributor to Stockpickr and an independent trader who focuses on stocks, options, futures, commodities and currencies.