Investors tend to project a lot of optimism in January, under the assumption that stocks can make up for any underperformance by the end of the year, Morgan Stanley analyst Adam Parker wrote in a note today. But the “January effect” can often lift junk stocks, while leaving more quality names behind.
“Since 1901, the S&P 500 has averaged a 1.2% return during January with a standard variation of 4.3%. In the remaining eleven months of the year, the index has averaged a 0.5% monthly return with a 5.2% standard variation,” Parker wrote. “We analyzed returns by quality cohort since 1981 and found that both quality and moderate quality, on average, perform worse in January than during the remainder of the year. Low quality slightly outperforms in January, while junk is by far the largest outperformer on average.”
And with estimates coming down for the rest of the year, the rally we’ve seen recently doesn’t make much sense.
“2012 EPS estimates have fallen from $114 last August to $106 now, and the multiple has expanded this month, as many investors have viewed lower guidance as a positive for future estimate achievability. We agree that lower forecasts set stocks up better for later in the year, but dont think the recent rally that has coincided with the reduced outlook is sustainable.”
Morgan Stanley recommends health care and utilities stocks. In health care, three of its Overweight-rated names are Amerisource Bergen (ABC), Pfizer (PFE) and McKesson (MCK).
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