The poorest stocks in June are solid bets to outperform the US market in July. Because of portfolio window-dressing at the end of June, the month’s bad performance will have fallen even further than they would have otherwise. These equities are likely to rebound back once the artificial selling pressure subsides.
Window dressing is, without a doubt, a powerful force at various times throughout the year, not just at this time of year. Because more investors review their portfolio holdings in early January than any other month of the year, it should have the greatest influence around the end of December. As a result, fund managers go out of their way to sell their losers before December 31 in order to avoid having to record that they ever owned them. Managers who buy equities for window dressing have the exact opposite problem. These are the equities that have already outperformed the market and that managers want to highlight in their end-of-quarter holdings report. These stocks will perform even better as a result of their cosmetic purchases, but they will plummet back to earth once the new quarter arrives. The “short term reversal effect” is a pattern in which the preceding month’s worst performers fare best relative to the previous month’s best performers in January, as expected. This may be seen in the graph below, which shows monthly data going back to 1926. July is the pattern’s second-most powerful month. That makes sense because, after January, the second most popular month for investors to review their brokerage statements is July.
Conclusion-of-quarter window dressing is also less of a factor at the end of the first and third quarters, as expected. The short-term reversal impact is even less strong in April than in non-quarter-end months, as shown in the chart. In July, how to play the short-term reversal To take advantage of the short-term reversal impact, an exchange-traded fund was developed, as is commonly the case. “Seeks to profit on the trend for equities that have had sharp recent sell-offs to generate near-term rebounds,” according to Vesper US Large Cap Short-Term Reversal Strategy ETF UTRN, +0.09%. Because the ETF was only established in September 2018, its average monthly returns since then are only indicative of the long-term trend. However, its average return in July (4.1 percent) was higher than in any other month. I compiled the following list for anyone interested in the particular stocks that performed the poorest in June. I started with the S&P 1500 index’s 50 equities with the poorest June returns, then excluded any that were not currently suggested by any of the top-performing newsletters tracked by my newsletter-performance-tracking service. The equities listed below made it through the winnowing process. I’d like to point out that these 15 stocks dropped 15.4 percent on average in June, compared to 2.3 percent for the S&P 500 SPX, +0.36 percent.
-1.01 percent for Adient PLC ADNT
ALK (Alaska Air Group) is down 1.12%.
ADS (Alliance Data Systems) is down 1.16 percent.
CRMT, America’s Car Mart, is down 1.02 percent.
ARCB, -1.72 percent, ArcBest, ARCB, ARCB, ARCB, ARCB,
-1.15 percent for Goodyear Tire & Rubber GT
KB Home (KBH) is down 1.05 percent.
-1.56 percent for LCI Industries LCII
MOS, -1.82 percent Mosaic & Co. MOS, -1.82 percent Mosaic & Co. MOS, -1.82
MED MED MED MED MED MED MED MED MED MED MED MED MED
NEM, +0.69% Newmont Corp. NEM, +0.69%
OGN, -1.14 percent Organon & Co. OGN, -1.14 percent
PATK (Patrick Industries) is down 1.54 percent.
-1.52 percent for Regions Financial RF
Sabre SABR is down 1.71 percent.
I also noticed that these stocks have an average price/book value ratio of 3.3, which is significantly lower than the S&P 500’s 4.7 ratio. A value company is defined by its lower-than-average price/book ratio, thus it’s no surprise that value stocks will be favored by the short-term reversal approach. This is because value equities underperformed growth companies in June, but their fortunes may soon turn around. Mark Hulbert contributes to MarketWatch on a regular basis. His Hulbert Ratings keeps track of financial newsletters that pay a set price to have their portfolios audited. His email address is mark@hulbertratings.com. More: Here’s what the recent increase in inflation means for equities. Plus, if you’re thinking about buying gold, keep in mind that price increases are currently regulated./n
