The January Effect and insider trading anomaly can combine for unusually profitable opportunities. As year-end approaches, it’s a great time to scan the universe of equities for oversold, cheap stocks being accumulated by insiders.
The January Effect refers to the tendency for stock prices — especially small cap stocks — to appreciate more in January than in any other month.
Insider trading — particularly insider buying — often precedes unusual moves in stocks. Officers, directors and large shareholders often buy their own company’s stock when it is depressed relative to its “true” value. Insiders often have insights about business developments, industry conditions, etc., which they believe will result in an increase in the true underlying value of the company.
The January Effect and the insider trading anomaly often pack a strong one-two punch for investors buying late in the year. In addition, other stock market anomalies often overlap at year-end, contributing to arguably the best time of the year to be longs stocks.
At year end, stock market anomalies often overlap, offering unusually good opportunities for investors.
In financial markets, anomalies refer to situations when a security or group of securities performs contrary to the idea of efficient markets, where security prices are said to reflect all available information at any point in time. Anomalies represent enduring strategies for profiting in the stock market.
There has been debate over the years about why the January Effect happens or even if it really happens. Nonetheless, the anomaly is typically attributed to year-end tax-loss selling. “Window dressing” — whereby professional investors sell losers and buy recent winners late in the year — may also play a role.
The January Effect has also been found to be mostly a small cap stock phenomenon. In fact, a 1983 study by Don Keim confirmed the anomaly’s existence, but found it’s mostly limited to small-cap, low-priced stocks. The study found that half of the Small-Cap Effect (tendency of small stocks to outperform large) could be attributed to January returns alone.
So, late in the year, investors can take advantage of at least three anomalies: The January Effect, the Insider Trading anomaly and the Small Cap Anomaly.
But it doesn’t stop there. Abnormal selling at year end by some investors offers a chance to profit from other well documented stock market anomalies.
The Low Book Value Effect.
Extensive academic research has shown that stocks with below-average price-to-book ratios tend to outperform the market. Numerous test portfolios have shown that buying a collection of stocks with low price/book ratios will deliver market-beating performance.
The Low-PE effect.
Stocks bought at low price/earnings ratios lead to better performance than stocks bought at higher ratios of price to earnings. Included within this anomaly are high dividend stocks and low prices in relation to sales and cash flow (earnings plus depreciation expense).
Reversals
Reversion-to-the-Mean is almost a law of nature with respect to company performance. Very often, companies whose recent performance has been poor tend to perk up and improve. Buying the “Dogs of the Dow” is a well-known strategy that buys the Dow Jones Average’s worst performers at the end of the year, anticipating mean reversion.
Below are lists of stocks that may be set-up to benefit from a handful of stock market anomalies. All are trading near year lows, with cheap valuations and have recently been bought by insiders.
As always, due your homework. Cheap stocks can always get cheaper!
Stocks with 8% or greater yields, recently trading within 10% of 52- week lows, where insiders have recently purchased.
| Last Filing | Company | Ticker | Industry | # Insiders | Last Trade | Total Shares | Avg. Price | Total |
| 22-Nov-2019 | Western Midstream Partners,… | WES | Gas Utilities | 1 | 06-Aug-2019 | 80000 | 24.98 | $ 1,998,032 |
| 21-Nov-2019 | New Media Investment Group … | GCI | Publishing – Newspapers | 1 | 21-Nov-2019 | 285000 | 6.61 | $ 1,883,850 |
| 14-Nov-2019 | Oaktree Capital Group, LLC | OAK | Regional – Mid-Atlantic Banks | 1 | 12-Nov-2019 | 4211 | 27.21 | $ 114,581 |
| 13-Nov-2019 | Colony Credit Real Estate, … | CLNC | Other | 1 | 13-Nov-2019 | 100000 | 11.93 | $ 1,193,000 |
| 12-Nov-2019 | Quad/Graphics, Inc. | QUAD | Business Services | 4 | 08-Nov-2019 | 26063 | 4.48 | $ 116,766 |
| 12-Nov-2019 | Neuberger Berman Mlp & Ener… | NML | Other | 1 | 08-Nov-2019 | 50000 | 6.59 | $ 329,460 |
| 06-Nov-2019 | American Capital Agency Corp. | AGNC | REIT – Residential | 1 | 05-Nov-2019 | 7350 | 17.01 | $ 125,060 |
| 31-Oct-2019 | Stonemor Partners LP | STON | Personal Services | 1 | 30-Oct-2019 | 3925660 | 1 | $ 3,925,660 |
| 25-Oct-2019 | New Mountain Finance Corpor… | NMFC | Conglomerates | 4 | 23-Oct-2019 | 400000 | 13.25 | $ 5,300,000 |
Stocks with Price-to-sales ratios less than 1.25x that recently traded near 52-week-lows and have seen recent insider buying
| Last Filing | Company | Ticker | Industry | # Insiders | Last Trade | Total Shares | Avg. Price | Total |
| 21-Nov-2019 | Universal Insurance Holding… | UVE | Property & Casualty Insurance | 3 | 20-Nov-2019 | 23,400 | 28.23 | $ 660,585 |
| 13-Nov-2019 | Encana Corp | ECA | Major Integrated Oil & Gas | 1 | 12-Nov-2019 | 22,000 | 4.52 | $ 99,540 |
| 12-Nov-2019 | Tuesday Morning Corp. | TUES | Discount, Variety Stores | 1 | 08-Nov-2019 | 65,000 | 1.54 | $ 100,120 |
| 12-Nov-2019 | Flexsteel Industries Inc. | FLXS | Home Furnishings & Fixtures | 4 | 08-Nov-2019 | 9,880 | 17.69 | $ 174,733 |
| 07-Nov-2019 | Stewart Information Service… | STC | Surety & Title Insurance | 1 | 07-Nov-2019 | 11,316 | 40.61 | $ 459,593 |
| 01-Nov-2019 | Fedex Corp | FDX | Air Delivery & Freight Services | 1 | 01-Nov-2019 | 5,000 | 156.5 | $ 782,500 |
| 01-Nov-2019 | Trinity Industries Inc. | TRN | Railroads | 1 | 01-Nov-2019 | 1,650,000 | 19.95 | $ 32,912,500 |
| 01-Nov-2019 | Landec Corp. | LNDC | Synthetics | 1 | 31-Oct-2019 | 5,100 | 9.74 | $ 49,674 |
Stocks with Price-to-Book ratios less than 0.8x, that have recently traded near 52-week lows and have seen recent insider buying.
| Last Filing | Company | Ticker | Industry | # Insiders | Last Trade | Total Shares | Avg. Price | Total |
| 21-Nov-2019 | Carrizo Oil & Gas Inc. | CRZO | Independent Oil & Gas | 1 | 20-Nov-2019 | 50,000 | 6.47 | $ 323,690 |
| 19-Nov-2019 | Centennial Resource Develop… | CDEV | Other | 3 | 15-Nov-2019 | 157,500 | 3.41 | $ 537,337 |
| 18-Nov-2019 | Tidewater Inc. | TDW | Shipping | 3 | 18-Nov-2019 | 25,711 | 14.33 | $ 368,313 |
| 18-Nov-2019 | U.S. Silica Holdings, Inc. | SLCA | Industrial Metals & Minerals | 4 | 15-Nov-2019 | 35,000 | 5.06 | $ 176,976 |
| 15-Nov-2019 | Preferred Apartment Communi… | APTS | REIT – Residential | 2 | 14-Nov-2019 | 10,460 | 13.07 | $ 136,744 |
| 13-Nov-2019 | Party City Holdco Inc. | PRTY | Specialty Retail, Other | 3 | 11-Nov-2019 | 338,240 | 2.32 | $ 784,717 |
| 13-Nov-2019 | Gran Tierra Energy, Inc. | GTE | Independent Oil & Gas | 7 | 08-Nov-2019 | 3,021,800 | 1.14 | $ 3,452,461 |
| 13-Nov-2019 | Hersha Hospitality Trust | HT | REIT – Retail | 3 | 12-Nov-2019 | 10,906 | 13.42 | $ 146,348 |
| 13-Nov-2019 | Colony Credit Real Estate, … | CLNC | Other | 1 | 13-Nov-2019 | 100,000 | 11.93 | $ 1,193,000 |
| 13-Nov-2019 | Encana Corp | ECA | Major Integrated Oil & Gas | 6 | 12-Nov-2019 | 117,800 | 4.07 | $ 478,906 |
| 12-Nov-2019 | Tuesday Morning Corp. | TUES | Discount, Variety Stores | 1 | 08-Nov-2019 | 65,000 | 1.54 | $ 100,120 |
| 07-Nov-2019 | Rayonier Advanced Materials… | RYAM | Chemicals – Major Diversified | 1 | 06-Nov-2019 | 100,000 | 3.63 | $ 363,400 |
Disclaimer:
Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this blog is meant for educational and informational purposes only. Do your own research before investing and don’t risk more than you can afford to lose. This article expresses my own opinions, and I am not receiving compensation for it (other than from WhaleWisdom). If you buy a book after clicking on one of the above links, I may received an affiliate fee. I do not have a business relationship with any company whose stock is mentioned in this article. I or my associates may hold positions in the stocks discussed.
