The presidential election just ended and, regardless of how your
choice fared, it's now time to comprehend what an Obama second term
indicates for the stock market. It's always extremely difficult to
get a bearing on the market's future and that is never truer than
today, given the amount of uncertainty in the global economy. But,
we can look to the past for clues on how certain types of stocks
preformed after an election.
The analysis of Election Cycle investing has a long history dating,
at least, from Herbst's and Slinkman's 1984 paper. They discovered
that markets and political cycles do dance to a similar tune, which
crescendos in November of the presidential election year. An often
quoted study by Haung shows results are generally higher in the
last two years of a presidential term when compared to the first
two years.
The Handbook of Equity Market Anomalies
summarizes most of the important studies regarding Election Cycle
investing. The book also goes into much more detail than I have
room for here, so I recommend that you read that section of the
book. But the major point that Hensel and
Ziemba
(2000) discovered is that Small Cap stocks perform better than
Large Cap stocks during Democratic administrations. The
outperformance of Small Caps averages over 18% a year from
1929-1997. That's extremely dramatic and, as they prove,
statistically significant.
Their research was updated through 2010 to include the majority of
Clinton's second term, both of George W. Bush's terms and the first
two years of Obama's first term. The 1998-2010 period also shows
Small Caps outperform Large Caps during Democratic presidencies.
But one thing that struck me the most was that most of the
outperformance was captured within thirteen months after the
election. So if history is going to repeat itself, it looks like
Small Caps are going to have a pretty good year in 2013.
The Diamonds in the Rough
There are about 2200 Small Cap companies out there, so you're going
to need to figure out the best way to capture the Small Cap Effect.
You could always simply buy a Small Cap ETF, but what fun is that?
Wouldn't you like to be able to find a way to select the best Small
Caps yourself instead of simply buying the shrink-wrapped version
in an ETF?
Well there is a tool that enables you to whittle those thousands of
companies down to a manageable number. With the
Zacks Research Wizard
you can start with nearly 7600 companies at your disposal. You can
then add filters to select stocks based on market value, numerous
valuation and growth measures, price changes, the Zacks Rank and
many, many more. But the best part about it all is that once you
create a screen, you can then backtest it to see how it would have
performed in the past. You'll be able to remove all the guess work
and know what works in picking stocks and what doesn't.
A Small Cap Example
There's a Small Cap screen in the Anomalies folder in the Research
Wizard, but, as a refresher, I'll share it below:
- First, limit the stocks to only Small Caps by requiring a
Market Value of at least $100 million, but less than $1
billion.
- Next, create a liquid, investible set of the stocks with
average daily trading volume greater than or equal to
100,000 shares
and
trading above $5/share
(if there's not enough liquidity, it'll be hard for you to
trade.)
- Add another filter by selecting only those stocks with a
Zacks Rank less than or equal to 2.
(Any Zacks Rank 3 or greater is either at or under market
performance.)
Here are five of the stocks that passed the screen this week
(11/09/12):
SUNH
- Sun Healthcare Group, Inc.
Sun Healthcare, through its subsidiaries, operates nursing centers
providing nursing, rehabilitative and related specialty healthcare
services principally to the senior population in the United States.
This stock has a market value of $216 MM and is currently a Zacks
Rank Buy. This company has had positive earnings surprises in six
out of the last eight quarters. Sun Healthcare has been a hot stock
this year, but its Price/Book, Price/Sales, and Price/Cash flows
are all below market and industry averages.
HCI
- Homeowners Choice, Inc.
Homeowners Choice, an insurance holding company, provides property
and casualty insurance in Florida. The company provides property
and casualty homeowners' insurance, condominium owners' insurance,
and tenants' insurance to individuals owning property. This firm
has beat earnings estimates in each of the last five quarters. The
consistent positive earnings surprises have prompted analysts to
increase future earnings projections. The combination of strong
positive surprises and increasing estimates is the reason why this
stock is a Zacks #1 Rank (Strong Buy).
CAMP
- CalAmp Corp.
CalAmp is a leading provider of wireless communications products
that enable anytime/anywhere access to critical information, data
and entertainment content. This firm is the leading supplier of
Direct Broadcast equipment to the U.S. satellite television market.
This company has experienced positive surprises in the last six
quarters. The stock price is up about 97% YTD, which has put a
damper on its valuation, but profitability is high and debt is low
at this $250 MM company.
LNDC
- Landec Corp.
Landec designs, develops, manufactures and sells
temperature-activated and other specialty polymer products for a
variety of food products, specialty industrial and medical
applications. This $269 MM company also has a strong history of
exceeding earnings expectations. This Zacks Rank Buy is also rated
as a Strong Buy by all four analysts that cover Landec. The stock
price has been on a tear this year, but has seen a recent pull
back, which often indicates a good buying opportunity.
BGFV
- Big 5 Sporting Goods Corp.
Big 5 Sporting Goods operates as a sporting goods retailer in the
western United States. The company offers athletic shoes, apparel,
and accessories, as well as a selection of outdoor and athletic
equipment for team sports, fitness, camping, hunting, fishing,
tennis, gold, snowboarding, and roller sports. As we all know, a
stock's price tracks corporate earnings and Big 5 is a perfect
illustration of this concept. The stock of this company rose when
it beat estimates in six out of the past seven quarters. And now,
analysts have been raising earnings expectations for the remainder
of this year and next year as well.
A Promising Situation for Small Caps
Because research has shown that Small Cap stocks perform well, on
average, during Democratic presidencies, 2013 bodes well for those
interested in a Small Cap investing style. In addition to the Small
Cap strategy I outlined above, the
Zacks Research Wizard
also has a number of other pre-built Small Cap strategies already
in the program.
Even though a number of outperforming strategies are ready to
provide stock picks, you also have the ability to create your own
ideas, Small Cap or not. With the Research Wizard, you're really
only limited by your imagination.
Starting today, you are invited to do this free of charge. You'll
have 14 days to create, tweak and backtest your strategies. At the
same time, you can see the latest picks from pre-loaded winning
strategies that average gains of up to 67.4% per year.
Learn more about your
Research Wizard
free trial >>
Let's make some money!
Kip Robbins is a Quantitative Analyst with Zacks.com. He
analyzes screens and strategies for Zacks customers and for use in
Zacks Research Wizard
which empowers individual investors to use market-beating screens,
build their own, and backtest their results.
BIG 5 SPORTING (BGFV): Free Stock Analysis
Report
CALAMP CORP (CAMP): Free Stock Analysis Report
HOMEOWNERS CHCE (HCI): Free Stock Analysis
Report
LANDEC CORP (LNDC): Free Stock Analysis Report
SUN HEALTHCR GP (SUNH): Free Stock Analysis
Report
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