Lower-Quality U.S. Stocks May Excel in January

Shares of companies with the worst track records on earnings and dividends are well positioned to beat their highest-rated peers next month, according to Savita Subramanian, head of U.S. equity strategy at Bank of America Corp.’s Merrill Lynch unit.

The CHART OF THE DAY shows how Subramanian drew this conclusion, presented in a Dec. 13 report. She tracked the performance gap between stocks with the two lowest quality rankings and those with the highest rating, as decided by Standard & Poor’s.

S&P classifies companies as A+, A, A-, B+, B, B-, C or D, based on their profit and payout histories in the past decade. The chart illustrates how C and D shares fared relative to A+ stocks in January, according to Bank of America indexes.

Through the first 11 months of this year, C and D stocks led by about 17 percentage points. They came out ahead by more than 10 points in nine full years between 1987 and 2012 -- and did better in the following January every time.

“This all bodes well for a low quality rally in January,” Subramanian, based in New York, wrote in the report. She added that the C and D stocks surpassed their A+ peers by an average of 6.5 points for the month in the past 25 years.

Stocks on the two lowest rungs of S&P’s quality scale have performed better in January than those on the top level for the last five years, Bank of America’s data showed. The streak is the longest since 1994.

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