John Dorfman—Stocks That Might Help Get a Jump on January Bounce

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There are two types of stocks that traditionally rally in January: small stocks and stocks that got murdered in the previous year.

Some call it the January bounce; others call it the January rally or the January effect. Perhaps a better term would be the year-end bounce. That’s because in recent years the bounce has sometimes begun in December or even November, as investors try to anticipate the rally.

The year-end bounce, although it is no sure thing, does occur in most years. As January approaches, investors sell their losers in order to reduce their taxes. That depresses the stocks further, making them ripe for a rebound.

If you want to play the bounce, it might make sense to concentrate on stocks that have both of the typical bounce characteristics. That is, you may want to choose stocks that are small and were big losers in the past 10 months.

Using Bloomberg stock-screening software, I looked for stocks that were between $250 million and $2 billion in market value (which excludes the largest 868 stocks), and that were down at least 40 percent this year through October.

Because I’m a value investor, I also required the stocks to have valuation ratios well below the average for the Standard & Poor’s 500 Index. The price-earnings ratio (stock price divided by per-share earnings for the past four quarters) had to be 15 or less. The price-book ratio (stock price divided by per-share corporate net worth) and the price-sales ratio each had to be 2 or less.

Finally, I filtered out any company with debt greater than stockholders’ equity.

These steps left me with a bounce-candidate list of 40 stocks, from which I have selected five that I like. In winnowing to 10, I looked for low debt and good-to-outstanding profitability in the latest fiscal year, and then sought a balance of different industries.

Guess Inc., based in Los Angeles, designs blue jeans and other cotton clothing. It contracts with outside manufacturers for the clothing’s production, and markets the clothes through catchy ads that I regard as enduring testimony to the proposition that sex sells.

Guess was plagued with slow sales and excess inventory, forcing it to slash prices to move its jeans. The main problem was industrywide overproduction. My guess is that the jeans glut will be alleviated in the next 12 months, making this stock a good rebound candidate.

Asyst Technologies Inc., based in Fremont, Calif., makes sealed containers and robotic transfer equipment used in semiconductor manufacturing. It’s a holding of Dreman Value Management in New Jersey, with which I have an affiliation. The stock is down 55 percent this year but we recently added to our holding at Dreman because we think it looks like a good value at 10 times recent earnings.

Midwest Express Holdings Inc., an Oak Creek, Wis.-based airline, has seen its stock price plunge from a high of $33 last December. High fuel costs and a bottleneck in pilot training have been two of the problems. I expect improvement on both of those fronts in 2001, and think the stock looks like a pretty good buy at 15 times recent earnings.

Fossil Inc. is a Richardson, Texas-based maker of watches and fashion accessories. Fossil’s balance sheet is almost debt free (as, incidentally, is that of Midwest Express). At the current price, the stock sells for a mere eight times recent earnings and less than its revenue.

Adaptec Inc., based in Milpitas, Calif., makes computer hardware and software for data storage. I recommended it in August 1998 at a price a little below $11. It was depressed then by concern about an Asian financial crisis. The stock rose as high as $62.25 early this year. Near its highs, Adaptec was too expensive for me. Now it’s back down to about $15 and I think it is a buy again.

If you find my reasoning persuasive, you can buy these stocks as a package, or cherry pick. I think most of them should be good for at least a short-term bounce. And I actually expect that most of them should do well through 2001.

John Dorfman is president of Dorfman Investments in Boston and a columnist for Bloomberg News.

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