5 Stocks for the January Effect

Whatever you call it, empirical evidence suggests that stocks, and mainly small
cap stocks versus large cap stocks, perform better in January as compared to any
other month of the year. This so-called “January effect” has been proven
to work time and time again.

There are many theories as to why the theory works, including tax-loss selling at
the end of the prior year and genuine enthusiasm for the start of a new year. Whatever
the cause, stocks do tend to go up in January in a disproportionate amount.

Will there be a January effect this year? I wouldn’t bet against it. Amidst
all the doom and gloom of 2008, we’ve seen a nice little rally in small cap
stocks in December. To finish the year, we can expect some tax-loss selling. That
would set the table nicely for a strong January effect to start 2009.

Here for the names of 5 stocks set to profit from the January effect.

Next:
Stock #1 – Frontier Financial Corp. (FTBK)

Stock #1: Frontier Financial Corp. ()

If the January effect is a result of tax-loss selling, where better to look for
stocks being sold due to losses than the banking sector? Money managers and individual
investors have taken a bath on bank stocks. While the credit crisis is far from
over, owning a bank stock in anticipation of a first month of the year rally makes
sense to me.

One name that has been obliterated in 2008 is Frontier Financial Corp. ().
I had recommended to my newsletter subscribers that they short this stock back in
2005 when it traded for $20 per share. Now you can buy the stock for less than $4
per share. Just recently the company announced that it was suspending its dividend
to preserve cash. That caused some serious tax-loss selling. I would use the opportunity
to buy.

Next:
Stock #2 – Parker Drilling (PKD)

Stock #2: Parker Drilling ()

This on- and offshore drilling company has been like a yo-yo in 2008. First, benefiting
from the record rise in crude prices, shares of Parker Drilling ()
rallied during the first half of the year. When oil prices collapsed, so, too, did
shares of PKD. Today, this small cap stock trades for less than $3 per share despite
having very good fundamentals.

If you’re looking for tax-loss selling, then look no further than PKD. The
stock has lost nearly half its value in just the last two months. If OPEC manages
to get tough on production, PKD could be poised to rally. I think investors will
flock to this oil drilling company in January providing a nice boost to those who
buy the stock in advance.

Next:
Stock #3 – NutriSystem Inc. (NTRI)

Stock #3: NutriSystem Inc. ()

Times have sure changed for former highflying momentum stock NutriSystem Inc.
().
The prepackaged weight management company had been a favorite of the fast money
crowd through 2006. Chinks in the armor began to appear in 2007 that continued in
2008. Remarkably, NTRI has fared fairly well through the credit crisis and market
crash of late 2008. In fact, the stock has rallied nicely off its lows.

I think there is more good news to come in January. The company has no debt and
close to $2 per share in cash on the balance sheet. NTRI is profitable, and although
profit growth is tough in this economy, once things settle, NTRI could very well
take off again. Why not start in January?

Next:
Stock #4 – K12 Inc. (LRN)

Stock #4: K12 Inc. ()

With two young children starting their schooling, I am keenly aware of the challenges
facing the public school system. Budget shortfalls, increasing class sizes and teacher
shortages make for a difficult environment. K12 Inc. ()
is keenly aware of these issues and hopes to attract parents like me to become customers
of its online education programs.

One of the few initial public offerings done in late 2007, LRN has lost half its
value over the last year. The company has a great business model and pristine balance
sheet. It is just the type of company that can move sharply higher due to the January
effect.

Next:
Stock #5 – ShengdaTech Inc. (SDTH)

Stock #5: ShengdaTech Inc. ()

While much of the news late in 2008 focused on a U.S.-led collapse, some of the
biggest losers in the market during the year had to do with China. Markets fell
hard during the year, and any stock having anything to do with China took it on
the chin. That is certainly the case with specialty chemical company ShengdaTech
Inc. ().

Shares of SDTH fell by some 80% over the last year as investors sold the stock in
droves. Will they return in January? I think it is likely so. Things may seem
bad today, but growth economies across the globe will return to a more normal state
in due course. SDTH has some innovative technology that will play a central role
in that growth. I’d have no hesitation owning shares at current levels.

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