Tapping the "January Barometer"

Inspired by the folk wisdom that the year's first month sets the tone for the next 11, we found some stocks that defied 2005's downdraft

By Michael Kaye, CFA

Each year, our colleague Sam Stovall updates Standard & Poor's January Barometer Portfolio (See BW Online, 2/2/05, "As Goes January, So Goes the Year?"). That's a list of industries poised to outperform the market based on the January Barometer, made famous by the Stock Trader's Almanac. Basically, the Barometer states that the S&P 500 index's performance during the month of January is indicative of how it will fare for the remainder of the year.

What kind of track record does the Barometer have? Stovall says since 1970, whenever the S&P 500 advanced in January, the market posted a further increase in the remaining 11 months of the year 86% of the time, gaining an average of nearly 12%.

LURED BY THE UPSIDE.

  Whenever the market fell in the first month of the year, the S&P 500 subsequently declined an average of 1.0% (although Stovall notes its frequency of correctly forecasting a down year was less than stellar, at only 46% accuracy). By the Barometer's lights, the 2.5% decline in the S&P 500 in January, 2005, might just signal a down year for the stock market.

Sam's idea to apply the Barometer on an industry basis inspired us to try it on an individual-stock level. We were much more attracted to what the Barometer says concerning the upside for stocks after a positive January, of course. So for this week's screen, we sought out stocks that bucked the market's January downtrend -- hard. We looked for stocks that posted gains of 15% or more for the month.

And while such resiliency in the face of a market slump was impressive, we wanted to make sure these stocks would be attractive investment candidates, based on fundamentals. So we next sifted for those issues ranked 4 STARS (buy) or 5 STARS (strong buy) by S&P's equity analysts. Stocks with those designations are expected to outperform the overall market in the next six to 12 months.

Here are the six names that our search turned up:

 OFF TO A STRONG START
Company Ticker S&P STARS Rank
Chico's FAS CHS 4
Humana HUM 5
Panera Bread PNRA 4
Rayovac ROV 4
Reader's Digest RDA 4
Quanex NX 4

Kaye is an analyst for Standard & Poor's Portfolio Advisors

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