Daily Gains Letter

Three Stocks to Profit While Market Struggles with Positive Return

By for Daily Gains Letter |

Three Stocks to ProfitIf January is any indication of the stock market action in 2014, we’re in for a long year. After a scorching year, the key stock indices are ending the first month of 2014 in the red. As we say goodbye to January, it’s worth noting that the S&P 500, after notching up five-percent in the first month of 2013, gave up three percent of its value during the first month of 2014.

The other indices aren’t faring any better. The NYSE posted a 3.8% gain in January 2013, but lost 3.2% of its value in January 2014. The Dow Jones Industrial Average gained six percent in January 2013, but at the close of January 2014, it’s down almost five percent.

But, if you listen to the overly optimistic statisticians, a bad January does not necessarily portend a bad year. Since 1962, in January, the S&P 500 has fallen by more than four percent nine times. But, when that occurs, the S&P 500 is actually up between February and the end of the year—though barely. During those nine years with losing Januarys, the average February–year-end returns tallied 1.08%. (Source: Ratner, J., “A weak January for stocks isn’t as bad as you think,” Financial Post, January 31, 2014.)

Though, there are some statistical anomalies in there that might just be helping the so-called as-goes-January seasonal anomaly, in two of the nine years (1968 and 2009), the S&P 500 reported double-digit gains over the final 11 months of the year. In 1968, the S&P 500 was up 12.1%; in 2009, it was up 35.3%.

In the same time, the S&P 500 saw a positive return in five of the nine years—or 56% of the time. Looking at it another way, there’s a roughly 50/50 chance we’ll post a princely one-percent gain.

While many suggest stocks are being impacted by factors that weren’t present a year ago…I think they may be overlooking some glaring economic similarities. Yes, the Federal Reserve has begun tapering its quantitative easing policy from $85.0 billion a month to $65.0 billion a month. But it also said it would keep interest rates artificially uber-low for the foreseeable future.

Aside from the pullback of easy money, how does January 2014 compare to January 2013? Economically, they look pretty similar; unemployment remains high, and those jobs that have been created have been in the low-paying retail sector. Jobless claims are up, wages remain stagnant, food stamp usage is at a record high, consumer confidence is down, and the housing market is in the doldrums.

This time last year, 78% of the reporting S&P 500 companies revised their first-quarter earnings lower. Today, 81% of S&P 500 companies have revised their first-quarter earnings lower.

While most analysts were expecting the S&P 500 to post a modest six-percent gain in 2014, that target might be a stretch. Earnings reality is finally seeping into the overvalued S&P 500.

However, there is some good news. The recent sell-off has presented a golden opportunity for financially solid dividend-paying companies. Some examples may be: tobacco manufacturer Altria Group, Inc. (NYSE/MO), which is a discount play that provides a 5.2% dividend; Philip Morris International Inc. (NYSE/PM), which provides a 4.6% annual dividend; and Lorillard, Inc. (NYSE/LO), which provides a 4.4% annual dividend.

In a year in which it looks as though the S&P 500 will be fighting to eke out a positive return, some higher-yield dividend stocks are looking increasingly attractive.

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