Coach, Conns, Rowan among January rebound candidates

The stock market's “January effect” is really the confluence of three effects. Stocks, in general, tend to rise in January. Small stocks tend to lead. And last year's losers often come back strongly — the “January rebound” or “January bounce.”

In this column, I suggest five stocks with January rebound potential. I compile this list in November because the rebound — which occurs most years but not all — sometimes starts as early as December.

I think there will be a meaningful bounce for 2014's losers in January. Why? Because quite a few investors, professional and amateur, are in the same position I'm in.

I achieved a lot of unrealized gains for my clients in 2013. In 2014, I sold some of those stocks, incurring taxable gains. So lately, I have been selling my losers to reduce the tax bite my clients face. Others surely are doing the same.

The January rebound is mostly a tax-driven phenomenon. Stocks that sag in January through September get kicked while they're down by tax-motivated sellers in October and November. Some of those stocks become bargains.

Coach

One that I expect to rebound is Coach Inc. (COH), a New York City-based company that purveys upscale purses and accessories. Coach is down 36 percent this year through Nov. 14 on disappointing results.

But some companies would love a bad year like Coach is having. Last quarter, it earned $119 million on sales of $1 billion.

Coach shares sell for 14 times the past four quarters' earnings and yield 3.9 percent in dividends.

Conns

Conns Inc. (CONN), with headquarters in The Woodlands, Texas, retails appliances in the southern United States. The stock has cratered as the chain incurred too many defaults on consumer debts and was widely viewed as offering overly liberal borrowing terms to consumers.

However, I feel that the loss year-to-date of more than 59 percent is overdone. I expect the feeble housing recovery to gain some oomph, in which case appliance sales would likely perk up. The company is exploring options, including selling itself outright or selling off its consumer lending operation.

Hanger

Hanger Inc. (HGR) makes orthopedic and prosthetic products such as braces and artificial limbs. The Austin company operates more than 700 clinics nationwide serving orthopedic and prosthetic patients.

The stock has fallen 46 percent this year as it delayed filing a financial statement, then reported a big increase in bad debts after intensified audits by Medicare. Predictably, it faces a spate of class-action lawsuits.

There is no way to cast that development as good news, but it's the kind of bad news that frequently dissipates after a while.

Rowan

The energy sector has been slammed in the past five months. Oil prices have fallen hard from about $104 to about $78 a barrel.

For long-term investors, I don't think the time to buy is at hand. But for traders, I think there will be a playable bounce in January. One stock that I think would work well is Rowan Companies plc (RDC), an offshore drilling contractor that is down 32 percent this year.

Prices for offshore work are falling, but Rowan has shown staying power over the years.

Pier 1

Fifth and finally, I recommend Pier 1 Imports Inc. (PIR), which operates a chain of more than 1,000 import shops in the United States and Canada. The dollar has been strong lately against most other currencies, a trend I expect to continue in 2015.

For Pier 1, with its head office in Fort Worth, a strong dollar means that the goods it imports from Asia will be cheaper, which should help profits in 2015. The stock is down almost 40 percent this year, and I think it has been punished too much.

Past results

Prior to today, I've written 11 columns with January bounce picks. The average 12-month return on my selections has been 12.3 percent, compared with 8.2 percent for the Standard & Poor's 500 Index.

Seven of the 11 sets of recommendations have been profitable, and six have beaten the S&P 500.

Last year's list narrowly beat the S&P in January but lagged it for the 12 months from Nov. 19, 2013, through Nov. 14, 2014. The 12-month return was 7.3 percent, compared with 16.4 percent for the index.

Bear in mind that past performance doesn't predict future results. My column picks are theoretical and make no allowance for trading costs or taxes. Results of my column recommendations shouldn't be confused with the performance of accounts I manage for clients.

John Dorfman is chairman of Dorfman Value Investments LLC in Boston. He can be reached at jdorfman@dorfmanvalue.com.