DMTK - Is The January Effect Real?

Summary

• On January 3, 2023, an hour before the first opening bell of 2023, I published a list of my top 29 January Effect 2023 stocks.
• As of the close of business, January 11, 2023, this portfolio is up a blistering +21.4% whereas the Russell 2000 is up 4.7%.
• Although this is a very small sample size, and we are only seven trading days into 2023, I write to introduce this data into the January Effect debate.

As I sit-down at my type writer, Jessica Fletcher style, yes that Jessica Fletcher, of the 1980s TV show, Murder, She Wrote, I write to share my January Effect 2023 portfolio performance month-to-date through January 11, 2023. Although, we are only seven trading days into calendar year 2023, I write to share some unusual findings.

Get this - in a bespoke portfolio - consisting of 29 securities that I hand selected, the equal weighted average return of this portfolio is a blistering +21.4%! For perspective, the Russell 2000 ( IWM ) is only up 4.7%.

And in case you are unfamiliar with the January Effect, and incidentally, my UMass Amherst Professor, Ben Branch, was once of the academic pioneers advancing the January Effect.

At a high level, and this is my interpretation of what the January Effect actually means - my perception of the theory goes something like this - year-end tax loss selling in low priced stocks tends to push stocks to extremes, as the selling is motivated by capturing tax losses to offset gains, and to minimize taxable income. Relatedly, and the definition of low price stocks might have changed since 1990, the original publication date, my sense is low price stocks equates with small caps. And generally speaking, there tends to be less institutional ownership of small caps, and therefore, technical selling, or tax loss selling in this case, can push volatility, due to illiquid, to extremes. Moreover, from a supply and demand standpoint, when the avalanche of selling ends, the absence of selling can be enough to create some levitation, at least in short term stock prices. Ultimately, though, stock prices are valued based on fundamentals.

So my question to the academics, those persnickety folks that live in those ivy towers and have fancy letters trailing their last names, such 'Phd' or 'M.D.' (as in Managing Director, not to be confused with members of the medical establishment) is how can a bespoke portfolio of 29 well curated names, be besting the Russell 2000 index, by chutes and ladders? How can this possibly occur if the January Effect is as purportedly as fictional as the toothy fairy or the Loch Ness monster?

And although I completely recognize that 29 stocks is by no means an exhaustive list, and by no means am I suggesting this offers any 'smoking gun', when it comes empirical evidence, I simply write to query the broader Seeking Alpha audience for their hypotheses.

Is this performance of my January Effect 2023 class just dumb luck that coincides with an optimal 'risk on' environment? as after all, Bed Bath & Beyond Inc. ( BBBY ) was up 69%, on January 19, 2023. In addition, the volume on BBBY was 238 million shares, and counting, as the casino still appears to be serving drinks and pumping high levels of oxygen throughout, as BBBY shares are up nearly 19%, in after-hours trading, as of 6:33pm (1/11/2023)!

In case I've piqued your curiosity, enclosed below is the list of my 29 well curated January Effect 2023 stocks. To be crystal clear, I handpicked all of these stocks amongst the hundreds of small caps that I follow, some names very closely, and others from afar. And like everything I do, when it comes to my process, this was 80% art and 20% science. This wasn't some quantitative screener that I ran and the computer spit out this magic list.

Leading the charge are the following Top 5 names:

• DermTech, Inc. ( DMTK ): +77.4%
• Mesa Air Group, Inc. ( MESA ): +59.5%
• Red Robin Gourmet Burgers ( RRGB ): +47.8%
• Cooper-Standard Holdings ( CPS ): +46%
• Rekor Systems, Inc. ( REKR ): +38.3%

Names 6 -10:

• Bark, Inc. ( BARK ): +36.9%
• Kopin Corp. ( KOPN ): +34.7%
• Orion Group Holdings ( ORN ): +26.5%
• Microbot Medical ( MBOT ): +24.3%
• HyreCar, Inc. ( HYRE ): +22.7%

Names 11-15:

• Vacasa Inc. ( VCSA ): +21.4%
• Ashford Hospitality Trust ( AHT ): +21.3%
• WW International ( WW ): +20.2%
• Culp, Inc. ( CULP ): +17%
• Gannett Co., Inc.: +16.4%

Names 16 - 20:

• Nautilus Inc. ( NLS ): 14.4%
• Yellow Corporation ( YELL ): +10.4%
• 1-800-Flowers ( FLWS ): +8.7%
• Alto Ingredients ( ALTO ): +8.3%
• GrowGeneration ( GRWG ): +7.9%

Names 21 - 25:

• iMedia Brands ( IMBI ): +7.8%
• Barnes & Noble Education ( BNED ): +7.4%
• Express Inc. ( EXPR ): +5.9%
• The Honest Company ( HNST ): +4.3%
• Advanced Emissions Solutions ( ADES ): +4.1%

Names 26 - 29:

• Lulu's Fashion ( LVLU ): +4%
• Ultralife Corp. ( ULBI ): +3.6%
• Kirkland's, Inc. ( KIRK ): +3.3%
• Vroom Inc. ( VRM ): +2.0%

Also, to be clear, I published this list to my marketplace group, on January 3, 2023, so before the first opening bell of 2023.

Framework For My Selection Criteria

My thought process, entering the year, was that 2023 would be an exceptionally rich setup for January Effect stocks. My hypothesis was we had a big washout, in 2022, and as they say in one of Netflix's ( NFLX ) latest hits, The Recruit, "you can swing a dead cat in Washington, D.C. and hit a lawyer", well on December 30, 2022, you could've swung a dead cat and chances you hit a stock down (at least) 50%. In 2022, there was literally blood on the street, and when you have so many stocks, down so much, any whiff of good news and you get some of these monster percentage up moves, off very low starting baselines. Secondly, the sentiment was so negative, ending 2022, and the year-end tax loss selling got extreme, at least anecdotally. Thirdly, in order to make the list, my January Effect 2023 list, I only included stocks that I thought would survive 2023, and where you could make a fundamental long case, for actually owning them.

Putting It All Together

By the time you are reading this article, it is most likely the morning or early afternoon of January 12, 2023. The December CPI data will have hit the tape, and depending on how hot that data came in, relatively to consensus estimates, of course, we could see another big up or down day. So trust me, I get it that my January Effect 2023 cohort only has 29 names, and that this blistering +21.4% average equal weighted performance will be difficult to maintain this type of velocity. That said, given how ridiculously outsized this data is, relative to the Russell 2000 benchmark, I wanted to introduce it, into the broader financial landscape, as yet another data point, albeit anecdotal, into the January Effect debate.

And lastly, I would love to hear more from readers on whether they are in fact believers in the validity of the January Effect.

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