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3 ways to capture the September effect
You dont have to wait until January to play seasonal trends in the stock market. Here are 3 ways you can still profit from the latest wave.
By Jim Jubak
Everyone knows about the January effect. In most years, stocks rally in January (or thereabouts), thanks to year-end selling prompted by tax considerations. That selling depresses stock prices, which is followed by a surge of buying when the new year rolls around.
But what about the September effect? Never heard of it, right? Well, its almost as strong as the January effect, if you know where to look for it.
Research by Sam Stovall, chief investment strategist and sector guru at Standard & Poors, shows that had an investor bought shares in January in the 10 industries with the best one-month performance in December and held them for 12 months, the average annual gain from 1970 through 2003 would have been 17.3%. That beats the 8.4% gain of the Standard & Poors 500 Index ($INX) by 107%. And according to Stovall, the January industry portfolio would have outperformed the index seven out of every 10 years during this period.
Not too shabby, eh?
Well, the September effect is just about as strong. If you bought the 10 best-performing industries for August on Sept. 1 and held them for 12 months, you would have gained 16.9% on average from 1970-2003, Stovalls research shows, versus a 9.7% average annual gain for the S&P 500. And you would have outperformed the S&P 500 in better than seven out of every 10 years. (The same strategy works just about as well if you put it into effect in October, showing a 15.6% average annual gain versus 9.2% on the S&P 500 and outperformance in, you guessed it, seven out of 10 years. Thats why I think its valid to put this strategy into effect now.)
OK, so what have been the 10 best-performing industries over the last month? Heres that list as of Sept. 24:
| Top 10/one month | | Industry | One-month performance | YTD performance | | | | | Consumer electronics | 16.9% | 43.0% | | Precious metals | 9.6% | -12.8% | | Home construction | 8.7% | 12.4% | | Consumer services | 7.9% | 1.2% | | Other non-ferrous | 7.7% | 5.4% | | Water | 7.7% | 1.0% | | Retailers, specialty | 6.6% | -1.0% | | Furnishings & appliances | 6.3% | -2.1% | | Mining, diversified | 5.9% | 53.4% | | Biotechnology | 5.9% | 4.2% |
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And, in case youre curious, heres the list of the 10 worst-performing industries over the last month.
| Bottom 10/one month | | Industry | One-month performance | YTD performance | | | | | Semiconductors | -12.8% | -31.2% | | Factory equipment | -6.7% | 1.6% | | Technology, hardware & equipment | -4.8% | -5.8% | | Communications technology | -4.0% | -5.2% | | Office equipment | -3.4% | 2.4% | | Paper products | -2.9% | -5.2% | | Advertising | -2.9% | -15.3% | | Trucking | -2.9% | 16.3% | | Software | -2.8% | -6.7% | | Automobile manufacturers | -2.5% | -17.9% |
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Minding the trends
I take industry-performance trends like these seriously. Academic research shows that roughly 60% to 80% of a stocks performance is due to the direction of the market and its sector, Stovall summarizes. In other words, its tough for a stock to move up if its bucking a downward move in the market or its sector. And upward momentum in the market and sector sure makes it a lot easier for an individual stock to climb.
In other words, market and sector momentum are exactly the kinds of trends that I look for to tilt the playing field in my direction when Im investing. (And downward momentum is exactly the kind of trend I dont want to try to buck. Remember, dont spit into the wind!)
The current market as a whole is either trend-less -- as we bounce back and forth from trading low to trading high and back again -- or stuck in a gentle but bearish decline -- as we set gradually lower lows and lower highs with each bounce inside the trading range. That means investors cant really count on a favorable push from a rising market to help their stocks move upward. And that makes concentrating your bets in rising sectors -- and avoiding the falling ones -- just that much more important right now.
3 strategies for the September effect
I think youve got three strategies available to you if you want to take advantage of the September (or September/October, for sticklers) effect. Buying all the stocks in an industry is a very expensive proposition, both in capital required and in commissions paid. Instead, you could buy the industry using an index product such as an ETF (exchange-traded fund) or a similar product such as a HOLDR. So, for example, instead of buying the shares of every stock in the entire biotechnology industry, you can buy the Biotech HOLDRs (BBH, news, msgs), which trades like a stock. That strategy will let you, for better or worse, capture the gain of the industry or sector.
Or, you can take advantage of the fact that industry indexes are weighted by market capitalization and try to capture the bulk of the gain in an index by buying the biggest stock in the sector. So, you could buy Newmont Mining (NEM, news, msgs) to capture the performance of the precious metals industry, for example. Newmonts market capitalization is $17.5 billion, which gives it far more influence over the gains of the industry index than the performance of a stock such as Glamis Gold (GLG, news, msgs), with its $2.3 billion market capitalization.
A third strategy would be to try to capture the September effect by putting your stock-picking expertise to work. Sticking with the precious metals industry, for example, you could buy shares in what you think is likely to be the best-performing stock in the industry over the next year rather than buying an industry index of the largest stocks. In this case, then, you would buy shares of Placer Dome (PDG, news, msgs) or Glamis Gold in preference to shares of Newmont Mining. Those two stocks are both smaller in market capitalization than Newmont, and therefore likely to be more volatile -- exactly what you want if the industry is moving up. And both Placer Dome and Glamis Gold score a 7 out of 10 from MSNs StockScouter, a considerable edge over the 5 scored by Newmont.
Putting the strategies to work
So which strategy should you pick? Id go with either No. 1, buying the index, or No. 3, stock-picking to beat the index. The middle choice, buying the biggest stock in the industry, doesnt save anything in commissions if theres an index product available. And it exposes an investor to greater risk, because you are buying shares in just one company rather than a diversified portfolio. I dont see the gain in this strategy to offset that risk. In strategy No. 3, you get the same kind of single-company risk, but you are trading that portfolio risk for the possibility of index-beating performance. Depending on the quality of your stock-picking (and how well you know the industry in question), thats a reasonable trade-off.
Im going to test these strategies head to head in Jubaks Picks. I already own shares of Newmont Mining in that portfolio, so Ive got strategy No. 2 covered. To test strategy No. 3, Im going to buy shares in Placer Dome with this column. (Full disclosure: I own shares of Placer Dome in my personal portfolio. Following the rules of this column, I wont sell that position until three days after Ive posted a sell recommendation for Placer Dome in this column, whenever that might be.) And to test strategy No. 1, Im going to buy shares of the Biotech HOLDR to put some more money to work in that industry.
Im also going to implement the other side of the September-effect strategy here and sell a stock, Rogers (ROG, news, msgs), that has a foot in two of the worst-performing industries, factory equipment and technology hardware. With the tax-selling season quickly approaching, Rogers is likely to see at least modest selling pressure from investors who are looking for an end-of-year tax loss. I still like the companys prospects in the long range, and Ill be looking to buy this back in 30 days or so, after Ive recognized my loss, if the price is right. Who knows, I might even be able to put the January effect to work.
Changes to Jubaks Picks
Sell Rogers
On Sept. 20, Rogers warned of a significant earnings miss for the soon-to-close September quarter. Instead of the 59 cents a share Wall Street analysts were projecting for the quarter, earnings will come in between 36 cents and 40 cents per share. The stock got clobbered, with shares plunging $5.40 on the news. This is the second time in recent months that Rogers shares have crashed on worries about the third quarter: They fell $11.99 on July 22. The problems at Rogers arent nearly as dire as the earnings shortfall suggests: Revenue, according to the company, will be down only somewhere between $1 million and $9 million for the quarter, or roughly 10%, at worst. The company continues to rack up extra costs as it moves production to China, a temporary problem, and a now-fixed quality problem in Europe cut production for the quarter. Sales also slowed as customers worked off inventory. The latter has been an all-too-common theme among technology companies and Rogers, as a supplier to the computer industry, is sharing the pain. I think the company will bounce back from these problems, maybe even as early as the first quarter of 2005, but with tax selling looming, I dont see the stock going anywhere in the next month or two. So Im taking my loss here, 36% since I bought the shares on June 4. Ill be looking to re-buy because the shares are very attractive in the long term at recent prices. A reminder to all those selling for a tax loss and thinking about re-buying: You have to stay out of the stock after selling for at least 30 days for it to count as a loss with the IRS. (Full disclosure: I will sell my shares of Rogers three days after this column is posted.)
Buy Placer Dome
Gold is one of the industries marked for outperformance by what Ive called the September effect: the propensity of industries that do well in August to beat the market for the next 12 months. Im buying Placer Dome as one way to take advantage of the trend that right now is blowing in the gold industrys direction. All else being equal, gold stocks trade on production, which looks steady at 3.5 million ounces annually, exploration -- the companys Pueblo Viejo project could go into production in the first half of 2005 -- and production costs, running at about $250 on ounce right now. Im setting a September 2005 target price for Placer Dome of $21.50. (Full disclosure: I own shares of Placer Dome in my personal portfolio.)
Buy Biotech HOLDRs
The biotech industry has two trends tilted its way right now: Its entering its seasonally strongest period of the year and the industrys outperformance in August and September marks it as a strong performer for the next 12 months, according to the September effect. The Biotech HOLDRs, a basket of 17 biotechnology stocks that trades like a single stock, is a relatively low-cost way to buy this sector. The portfolio is heavily weighted toward those big dogs of the biotech industry: Amgen (AMGN, news, msgs) and Genentech (DNA, news, msgs) make up almost 70% of the portfolio. But thats OK, because this HOLDR gives me exposure to the industry and diversification beyond what Id achieve if I bought just one or two stocks. (This is the first time Ive used an exchange traded fund or an equivalent instrument in this portfolio.) Im adding this HOLDR to Jubaks Picks with a February target price of $157.
Editor's Note: A new Jubaks Journal is posted every Tuesday and Friday.
E-mail Jim Jubak at jjmail@microsoft.com.
At the time of publication, Jim Jubak owned or controlled shares in the following equities mentioned in this column: Newmont Mining, Placer Dome and Rogers. He does not own short positions in any stock mentioned in this column.
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