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How To Pick Outperforming Stocks Month After Month After Month…

 February 28, 2013 01:23 PM


(By Rich Bieglmeier) From the local barber to the local butcher to the guy butchering your portfolio for a commission or fee, everybody is familiar with the old market axiom of "Sell in May and go away' till some early November day. iStock added the part about November, please petition the official axiom chronicler to include our indispensable contribution.

And, of course every novice investor is well aware of the January Effect – where stocks seemingly go straight up to start the year. Heck, we just lived through a January where it is hard to remember one down day.

But, what if there is more to seasonality investing beyond loading up on New Year's Ever and ditching Wall Street for summer vacation? A new paper titled Common Factors in Stock Market Seasonalities argues that less blatant season factors are always in play. You just have to know how to find them!

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For example, "market return is significantly higher during winter months than summer months, high-beta stocks have relatively higher returns during winter months," says the 59-page report.

The paper, researched and authored by Matti Keloharjushow, Juhani T. Linnainmaa, and Peter Nyberg showed, "that a trading strategy that chooses stocks based on their historical same-month returns earns excess returns as high as 12% per year." Bet that perked up some Alpha seeking money managers' interest – didn't it?

In a nutshell, this is how it works. Investors need to look a year back to see which stocks outperformed during the same time-frame. Step two is to identify the influencing factors. According to the report, the three most of important of which are "firm size (35%), BE/ME and dividend yield (22%), and industry (17%)."

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What works can change from month-to-month. The authors put it best, "This strategy, for example, may be long small value stocks with high market betas in a particular industry in one month, but the next month it is long big growth stocks with low market betas in a different industry. "

With February coming to a close, we decided to look back to March 2013's top performers based on March 2012's closing price relative to February 2012's closing price. We tossed out all the companies that didn't have complete data available. From there, iStock narrowed the list down to the stocks that outperformed the S&P 500 – 119 met were fully equipped with data and outran the S&P.

If Common Factors in Stock Market Seasonalities is correct, then Computer and the Technology, Finance, and Medical sectors should be at or near the top of March's leaderboard. Software, banks & thrifts, and drug stocks were the strongest industry performers within the sectors.

The average technology stock in our results traded with an average price-to-book value (P/B) of 3.62, with a negative P/E, and with an average market-cap of $351 million – so, small-cap and not profitable. The max market cap stood at $1.5 billion and P/B of 11.02; although, it was way out on the right as an outlier.

The average P/B for the finance winners was 2.08, tended to have low or slightly below water P/Es, and definitely small-cap with an average market value of $77 million.

You should be looking for almost profitable drug stocks, particularly biotech, that are borderline profitable, trade at an average P/B of 13.5, and with a market-cap around $226 million.

We tried to break it down and select some individual stocks, or even a mock portfolio; however, there 100s of potential candidates.  So, we use the list to identify some ideas in the days ahead that could outperform in March.
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