7 Stocks That Will Benefit From the 'January Effect'

It's the end of the year. Time to think about minimizing tax obligations.

Consider the January Effect. It can save investors significantly in their tax obligations.

The January Effect is a financial maneuver in which stocks are sold at a capital loss during the current tax year, then repurchased in the following tax year as a means of reducing tax liabilities from capital gains booked from the sale of other stocks.

For example, the selling pressure during the final weeks of 2015 may increase in those stocks that have performed especially poorly. Conversely, in January of 2016, the buying pressure may increase in the same shares, as traders wishing to maintain positions in those stocks sold in the final weeks of 2015 repurchase them.

This tax strategy creates an artificial downward bias in late 2015 to the price of under-performing stocks and an upward bias to the price of those same stocks in January of 2016. 

The Internal Revenue Service (IRS) allows capital losses to offset taxable capital gains, with the result reflecting the net capital gain (or loss) derived from trading stocks during the calendar year. At the end of a calendar year, two popular tax strategies are deployed, typically, during the period between late-November (and December) and Jan. 31 of the following year. The best way to illustrate the two techniques is by way of examples.

In the first example, a trader purchases XYZ stock at $10 a share (during 2015, or previous years). The same shares are then sold on Dec. 10, 2015 at $8 per share for a capital loss of $2 per share. On Jan. 5, 2016, the same shares are repurchased at $7.85 a share. Because the repurchase of XYZ was executed within 31 days of the Dec. 10 sale, the transaction (for tax purposes) is referred to by the Internal Revenue Service (IRS) as the "Wash-Sale." Under the Wash Sale Rule, the $2 a share capital loss may be added to the cost basis of the Jan. 5, 2016 repurchase price.

So, in this example, the $2 capital loss from the sale of XYZ on Dec. 10, 2015 cannot be used to offset other capital gains made in 2015. Instead, the IRS allows the trader to add $2 to the cost basis of the repurchase of XYZ on Jan. 5, 2016. In this example, the cost basis of the Jan. 5, 2016 repurchase calculates to $9.85 ($7.85 + $2) a share. If XYZ is then sold again during calendar year 2016, say, at $12 per share, the capital gain from the 2016 sale calculates to $2.15 a share, not $4.15 a share. This tax strategy defers a capital loss of $2 a share into calendar year 2016. 

In the second strategy, consider the same example but with one exception. Instead of the sale date of Dec. 10, 2015, XYZ was sold on Dec. 1, 2015. Because the repurchase of XYX (Jan. 5, 2016) was executed outside of 31 calendar days from the Dec. 10, 2015 sale, the IRS allows the capital loss to occur in 2015, which then can be used to offset other capital gains made in 2015. So, if a capital gain of $5 per share was booked in another stock in 2015, say, ABC stock, the $2-a-share loss from the sale of XYZ may be used to lower the $5-a-share tax liability incurred from the sale of ABC, to only $3 per share.

Separately, investors should be aware professional money managers who sell poorly-performing stocks late in the year with an eye toward regaining the position. This is a way of not appearing incompetent if some of their choices over the course of a year do not perform well.. This face-saving technique is commonly referred to as Window Dressing, and may add to a bullish bias toward stock prices in January.

Which stocks are most likely to benefit from the January Effect. Consider the seven companies below.

 BBRY data by YCharts 

BlackBerry (BBRY - Get Report)

• Though BlackBerry's dominance in the smartphone market has collapsed to a mere 0.3%, from more than 20% several years ago, the company's niche of delivering the market's most secure smartphones to security-conscious consumers and corporate clients may substantially raise its market share in 2016.
• What appears as unconfirmed evidence of sold-out stock at retailers, Wal-Mart and Best Buy, may indicate a better-then-expected demand for its smartphones and a better-than-expected bottom line to 2016 quarterly income statements.
• If sold-out stock at two of the largest retail outlets in the U.S. indicates better-then-expected demand, the consensus estimate of an 11-cents a-share loss may turn out to be too pessimistic.
• The stock trades closer to the bottom of its 52-week trading range, suggesting that a bias toward a negative sentiment among traders may not be appropriate. Evidence of a turnaround may be visible at this time.
• At a Price-to-Sales, Price-to-Book of 1.58 and 1.16, respectively, most traders remain unconvinced of a successful turnaround attempt. Future surprises weigh in favor of the bulls.

 GPRO data by YCharts 

GoPro  (GPRO - Get Report)  

• The drastic sell-off in GoPro from the Aug. 10 high of $65.49 is an overreaction to the realization of the company's projected slower-growth potential. With revenue approaching $2 billion, percentage growth rates are expected to slow as each additional dollar added to revenue mathematically diminishes the rate of increase. GoPro's recent price action, a normal and expected market correction, turned into a panic.
• Morgan Stanley's assessment of GoPro's line of action cameras, which recently heavily influenced the stock's price, comparing the line with standard digital cameras, is incorrect. Serving a niche market with an iconic brand and leading-edge technologies don't warrant comparative valuations with companies operating in the photographic equipment market, as Morgan Stanley suggests.
• Product introductions to new markets in 2016 may easily outstrip Morgan Stanley's 2016 estimates.
• Though GoPro's doesn't pay a dividend, the stock's Price-to-Sales, Forward P/E Ratio and PEG ratio of 1.36, 15.43 and 0.69, respectively, indicate an approximate 20% discount to the Nasdaq 100 Index.
• The company has no long-term debt. 

 BAS data by YCharts 

Basic Energy Services (BAS - Get Report)

• Energy stocks are hated and technically oversold, providing a potentially profitable contrarian play.
• Only a modest rebound in oil and gas prices may soar the price of BAS, as the stock's beta of 2.36 indicates a much higher-than-average volatility, especially for a company that recently traded at a market capitalization of more than $1 billion.
• Deteriorating geopolitical events in the Middle East favor an upside surprise in the energy markets and BAS.
• The bear market in commodities prices has surpassed the four-year mark, outlasting many previous commodities bear markets. 

 GLUU data by YCharts