Now Is the Time to Prepare for the January Effect

It’s called the January Effect and the time to prepare for it is right now, according to a report in the Wall Street Journal (http://online.wsj.com/article/SB10001424052970203537304577028411888026368.html?KEYWORDS=ben+levisohn). The effect, which has been chronicled by investors for decades, shows that small stocks, and those that have suffered and declined in price, tend to outperform larger, stronger stocks in January.

The story offers statistics that show “from 1927 through 2004 small stocks beat large stocks by an average of 2.5 percentage points during January.” At least two theories are offered for why this occurs. Some suggest the weaker small stocks are often sold off in December so losses can be used for tax purposes, and then bought back in January; others say it’s about mutual funds selling stocks that have had losses in December so they don’t get mentioned in their year-end report, then buying them back in December, according to the WSJ.

The article adds that Ned Davis Research (http://www.ndr.com/) publishes a list of its January Effect Stocks each December. The list is created by “screening for the smallest 150 stocks in the S&P 1500-stock index that also are among the 10 percent of stocks furthest from their calendar year closing high.” Also noted is that Ned Davis Research’s list returned an average of 8.6 percent from mid-December through the end of January and much less from Jan. 1 though the end of the month.

We don’t have a formula for picking stocks that might be boosted by the January Effect like Ned Davis Research does, but here are three smallcap stocks that have been hit hard this year and show promise for 2012:

Manitoba-based IMRIS, Inc * (Nasdaq:IMRS, http://www.imris.com/) provides hospitals with a new take on a new trend called intraoperative imaging: fully integrated image guided therapy solutions – actually a fully functioning surgical suite –  that delivers images and information to clinicians during surgical or interventional procedures. The IMRIS suites incorporate magnetic resonance imaging and fluoroscopy into the operating room, actually allowing the patient to be imaged without moving.  IMRIS stock has been as high as the $8 range but has fallen in the past few quarters due to much weaker than expected bookings in 2011. On its quarterly conference call, however, management told investors they expect a much better 2012. IMRS, which traded at $4.15 as recently as Sept. 2, closed Nov. 15 at $2.59.

Poway, CA-based Digirad * (Nasdaq: DRAD, http://www.digirad.com/) has two business segments: Digirad Imaging Systems, or DIS, provides physicians with personnel and equipment services for performing nuclear imaging, echocardiography and vascular ultrasound; the product side of the business sells cameras for nuclear imaging including its new ergo large field-of-view, general purpose portable imaging system. Ergo’s unique, ergonomic, lightweight design allows it to be moved easily anywhere in might be needed in the hospital.

Digirad is small ($40 million market cap) and on November reported revenue for the first nine months of 2011 of $41.9 million.  But it also reported a cash balance of $31.6 million as of the end of the third quarter on September 30, so it has the resources  to make an important strategic move. DRAD stock, which has been as high as $3.10 back in May, closed November 15 at $2.13.

Mountain View, CA-based Iridex * (Nasdaq: IRIX, www.iridex.com) is another small company on the rise.  Following a 3-year turnaround placing the company on solid footing, a new CEO, Dominik Beck, has taken the reins and promises a more commercial orientation.  Based on the flat nature of the valuation for the past year, and a new catalyst in the management ranks, this might be one to watch.  Iridex was trading at $3.66 on Novemnber 16.  The 52-week range is $3.08-$4.75.

* Denotes a client of Allen & Caron Inc., publisher of this blog

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