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What are we looking for?

U.S.-listed large-cap stocks that may benefit from the "January effect.”

Despite a volatile and rocky start to the year, many stock pickers believe in a principle known as the January effect, in which stocks rally in the first month. Stocks most affected by the January effect should be those that traded significantly lower in the preceding year and therefore are candidates for year-end tax-loss selling and/or window dressing by portfolio managers. (“Window dressing” is the practice of dumping losing stocks in December and replacing them with better performing stocks that can make a portfolio’s holdings look better.) In addition, stocks that have sold off strongly in the final quarter of the year are more likely to find themselves in an oversold position. Given the market downturn in the final months of 2018, tax-loss selling may have a larger role than normal in creating January investing opportunities.

The screen

We will be using Trading Central Strategy Builder to search for U.S.-listed large caps that have sold off in 2018 yet represent good, continuing value based on their price-to-earnings ratios and dividend characteristics.

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We begin by setting a minimum market capitalization threshold of US$10-billion. Although the January effect should affect all stocks, portfolio managers are more likely to be holding large-cap stocks than their small-cap counterparts.

Next, we will look for stocks that have sold off strongly in 2018. We will select only stocks that have experienced price declines of at least 25 per cent in the past 12 months and at least 15 per cent in the final quarter of 2018.

To ensure we are positioning into good quality, well-valued stocks for the long term, we will filter for trailing P/E ratios of 20 or less. Additionally, we will look for strong dividend characteristics in the form of dividend yields of at least 2.5 per cent and a one-year dividend growth rate of 6 per cent or more.

More about Trading Central

Trading Central is a global leader in financial market research and investment analytics for retail online brokers and institutions. Trading Central’s product suite provides actionable trading ideas based on technical and fundamental research covering stocks, exchange-traded funds, indexes, forex, options and commodities.

What we found

Topping our list is tobacco giant Altria Group Inc. Altria stock declined more than 30 per cent in 2018, with the bulk of this coming in the months of November and December when the stock recorded a 24-per-cent decline despite posting good third-quarter earnings in late October. Altria stock offers a 6.6-per-cent dividend yield and 8.1-per-cent dividend growth rate, making it a candidate for investors looking for long-term dividend growth.

The financial services sector is overrepresented in our list with five out of nine companies coming from this sector. Canadian insurance titan Manulife Financial Corp. declined 32 per cent in 2018 with a fourth quarter drop of 20.7 per cent. Manulife is now at its lowest level since 2016 and has a trailing P/E of 15.2 and a dividend yield of 5.3 per cent.

An interesting non-financial stock on our list is International Business Machines Corp., which lost more than 25 per cent in 2018. IBM’s dividend yield is now sitting at 5.5 per cent – the highest in more than 20 years. With the company’s recent acquisition of Red Hat Inc. now behind it, many analysts see strong upside for the stock in 2019.

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The investment ideas presented here are for information only. They do not constitute advice or a recommendation by Trading Central in respect of the investment in financial instruments. Investors should conduct further research before investing.

Select U.S.-listed large caps

Rank Company Ticker Recent Price (US$) Market Cap. (US$Mil) 52 Wk Price Performance 13Wk Price Performance P/E (TTM) Div. Yield
1 Altria Group Inc. MO-N 49.11 92,806 -30.8% -19.0% 8.8 6.6%
2 Carnival Corp. CCL-N 48.76 35,759 -25.7% -20.4% 11.1 4.2%
3 Prudential Financial Inc. PRU-N 82.32 33,680 -29.1% -19.3% 5.1 4.4%
4 Canadian Natural Resources Ltd. CNQ-N 24.84 29,096 -32.5% -24.8% 10.4 4.2%
5 Manulife Financial Corp. MFC-N 14.17 28,163 -32.0% -20.7% 15.2 5.3%
6 KeyCorp KEY-N 14.98 15,290 -26.7% -25.4% 10.4 4.7%
7 Ameriprise Financial Inc. AMP-N 106.97 14,545 -38.4% -28.3% 9.3 3.5%
8 State Street Corp. STT-N 62.80 23,937 -35.4% -25.7% 10.2 3.0%
9 International Business Machines Corp. IBM-N 114.05 103,303 -25.9% -24.8% 18.5 5.5%

Source: Trading Central

Peter Ashton is vice-president of customer success at Trading Central.

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