"I like the cold weather. It means you get work done." -- Noam Chomsky
No, the January Effect and the Polar Vortex are not the same thing. The term "Polar Vortex" might just be an excellent name for a metal band. That term applies to the extreme cold weather that most of the country has been going through. The Polar Vortex actually always exists. Usually, the vortex is strong enough to keep warmer air out and contain colder air. When it is at its weakest, that's when arctic air actually escapes and moves toward the equator. That's when we feel so cold. Being that over time human beings have evolved, physically, into a very soft species, this is what almost all of your local newscasts have been focusing on. Next.
The January Effect? Now, that's a whole different ball game. Tuesday's rally might be part of it, but not really. Not specifically, anyway. Don't forget that the first two trading days of January are almost always included as part of the "Santa Claus Rally" talk, as the first two days of the year almost always bring in new money. Yesterday's move higher was easily telegraphed, and I did mention the likelihood in this space yesterday morning.
The actual term "January Effect", which is not truly part of the Santa Claus Rally, refers to the movement of funds into names that have suffered through the month of December due to the short-term impact of forces such as tax-loss selling, and the dark side of window dressing. What do I mean by that? Window-dressing can be a short-term positive force, as portfolio managers want to impress the folks who have bet on them with their hard-earned money. They "chase" those winners into year's end to make sure that their annual and quarterly reports end up showing a nice collection of intellectual triumph. The flip side is often true. These same managers will cast off their losers as the year moves into its final weeks as to not have to show wrong way bets. This artificially depresses market prices in names that have already done poorly.
Then, there's tax-loss selling, which has been a little difficult to predict this year due to the pervasive uncertainty that permeated tax law thinking going into year's end. However, the old truth is indeed still true. If you have realized winnings and you are going to have to pay capital gains taxes on them, it behooves one to also realize losses on those bets that have not paid off as the new year approaches, so as to reduce the tax bill already known to be on the way.
Why the Effect?
Historically, this is when bonus money and other types of realized year-end payments come into the marketplace. This is also the time of year when many folks, professional and otherwise, rebalance their own portfolios. That money usually hits the market broadly, but looks especially hard at perceived bargains. The Dogs of the Dow? To some degree, yes. Cheap stocks? Sometimes one and the same. One of my own holdings actually fits the description of a stock that experienced tax loss selling in December, as well as the darker side of window dressing. That would be General Electric (GE) . GE also happens to be "THE dog of the Dow".
Action Alerts PLUS charity portfolio holding General Electric suffered through an awful year and an awful month, underperforming the Dow Jones Industrial Average, of which the name is a component, as well as the broader markets by a wide margin. New CEO John Flannery was forced to slash the dividend in November due to cash flow concerns that have only "maybe" been somewhat mitigated.
You see GE yesterday? The stock ran 3% during the regular session and topped $18 overnight. Now, GE is a conglomerate, but thanks to its 62.5% stake in Baker Hughes (BHGE) it benefits from the oil trade, so this is not clean. Still, this may be the best example we have of a January Effect-type name this year. You might think that Verizon (VZ) fits the bill. That name certainly had a lousy year, and is semi-cheap, but failed to underperform the market over the past month. The benefit might not be there. Chipotle Mexican Grill (CMG) ? Now there, you had both tax selling, and reverse window dressing. The name is not cheap by any measure.
Those interested in playing CMG might look toward the options market as a way to get involved at reduced risk. Think January might get hot for this one? Last night, the Feb. 16 $300 calls went out offered at $12.70. I know, that's a lot to lay out. Feb. 16 $280 puts closed at $9.80. If you are the kind of trader that stays alert and focused, you could sell (write) those, and pocket nearly a thousand clams per. You will be at the risk of buying the equity at $280 if you fall asleep on this one, so there is danger, but you do have a $12 cushion right now. If that frightens you, or scratches the surface of your tolerance for risk, then this is one that you take a pass on. In that case, you play GE equity with its limited two-way risk in the short-term. That is my opinion.
Duck Duck Goose
Yesterday, news made the rounds that Loup Venture (co-founded by analyst Gene Munster) had gone out on a limb and made the case among several 2018 tech sector predictions that Amazon (AMZN) might make some kind of play for Target (TGT) at some point during this year. True, Target has 1800 U.S. stores and has at least traditionally been Walmart's (WMT) biggest bricks-and-mortar rival. True, Target has made strides toward improving itself, particularly from an e-commerce perspective. I just see this differently -- and I may be talking my own book, so keep that in perspective while judging my opinions. One tends to be the last to know, when one loses their own objectivity.
You all know that I have pounded the table for most of the past year about Walmart and Kohl's (KSS) . In fact, I am fairly certain that among financial talking heads, I was indeed first to Walmart. Now, both of these have been outstanding long positions on my book, and it is hard not to fall in love when a long position takes off like this, and pays a nice dividend. That is the case with KSS (4% yield). By the way, KSS has 1166 physical stores in the U.S. itself, so nationwide exposure is not a problem there. KSS has also made tremendous inroads toward the "family" demographic as a stand-alone discounter of apparel, jewelry, kitchen-ware, toys, shoes, you name it, except groceries. Target is a grocer. Kohl's is not. Amazon has already bought and paid for Whole Foods. That's 470 physical locations that Amazon already has in its hip pocket.
Operating profit margin? KSS 36.8%, TGT 30.1%. EBITDA margin? KSS 11.5%, TGT 9.0%. Debt to capital ratio? KSS 0.47, TGT 0.53 Current ratio? TGT 1.63, TGT 0.96. By all of these measures, KSS looks like the better executed company, and that is what I believe. That's why I bought the name and still hold it, long after the share price catapulted well past my target price.
There Is One More Thing
One other reason that I stayed long Kohl's is that I also believe that Amazon will look to spread its wings in a physical sense. On Oct. 18, Kohl's and Amazon started doing business together. Kohl's agreed to sell Amazon's smart home products in dedicated spacing within its stores in both Los Angeles and Chicago. Obviously, an experiment. Kohl's also agreed to accept Amazon returns in the physical sense, even for purchases that have nothing to do with Kohl's. That certainly sounds like Amazon sticking one toe in the water to see how nice and warm it is.
Does anything come of this? I do not know. I have no inside information. I will tell you this, though. Since Oct. 18, the S&P 500 is up roughly 5%. The SPDR S&P Retail ETF XRT has gained 14% since that day. TGT? 14%, in line with the ETF. KSS? Oh, just 30% or so. No big deal. See chart below. Even yesterday, while Target was basking in the glow of this research report and seeing the value of its shares rise 3.65%, it was yet again outperformed by the shares of KSS. Those shares scored 3.9% gains yesterday.
I May Be Wrong
You might be crazy. Do we know anything? No. It is clear, though, at least to me, that Amazon is already working with Kohl's while testing the waters of broader physical retail. While Amazon was running a herd of bulls through the retail industry for most of last year, management at Kohl's found a way to cozy up to the bully, and become their pal -- all while paying you that dividend.
Does Amazon buy Target? Maybe. Would not be the first time I was wrong about something in my life. Just feels more to me like Amazon and Walmart are respectively the leaders in e-commerce and physical retail. Both are looking to find ways to compete on the other's turf. Those outside of the big two need to find either a niche or an ally to survive in decent shape. KSS, for now, has that alliance. Target, in my humble opinion, due to some duplication of services, would have to come real cheap.
Chart of the Day: TGT vs. KSS since Oct. 18
Sarge's Trading Levels
These are my levels to watch today for where I think that the S&P 500, and the Russell 2000 might either pause or turn.
SPX: 2720, 2708, 2701, 2692, 2686, 2678
RUT: 1569, 1561, 1550, 1542, 1535, 1529
Today's Earnings Highlights (Consensus EPS Expectations)
After the Close: (RAD) (-$0.02).