Let’s put those Christmas bonuses to work! The Santa Claus rally is coming, but he won’t be stopping by to give every sector gifts this year. So, we’ve detailed where the best investments will be made going into 2015. These are the sectors that are firing on all cylinders right now even though some sectors are in turmoil.
Most investors have heard of the Santa Claus rally, but some believe it as much as Santa Claus himself. Yet, they make be too quick to judge.
The idea of the Santa Claus is that the market rises during year-end holiday season as joyful investors are using their Christmas bonuses to buy stocks.
But Wall Street wasn’t feeling all that jolly for the first part of December after a gutting of oil prices and any stock remotely tied to oil.
However, despite the uncertainty surrounding oil, the market could still see the mysterious Santa rally over the next couple weeks.
A little history
Historically, December has been one of the strongest months of the year for the market (in tight competition with July). Since 1928, the S&P 500 has been up during the month of December 75% of the time — posting an average gain of 1.5%.
What’s more, over the last 50 years the Dow Jones Industrial Average (DJIA) has been up 70% of the time for the month of December. And the average gain for the DJIA has been 1.6% during that month.
More recently, the Santa rally has been stronger. The S&P 500 has been positive for the month of December in each of the last five years — posting an average gain of 2.4%.
And while the Santa Claus rally is generalized to include the entire month of December, it’s generally the last half of the month that does all the heavy lifting — specifically the week between Christmas and New Years.
This comes as the majority of tax loss selling and window dressing (i.e. selling off unpopular names so they don’t show up on year-end reports) was done earlier in the month. Now, over the next week or so, investors will be looking to invest in the winners of 2015.
And with international uncertainty looming (think: Russian turmoil, European economic weakness, Japan re-entering recession, and renewed concerns surrounding Greece), the U.S. appears to be one of the safest places to invest.
There really appears to be a perfect storm brewing that could mean Santa will be stopping by the stock exchanges this year.
Here’s why it works this year
The Fed may have made our Santa rally dreams come true last week. Per the Fed’s recent meeting, rates aren’t rising anytime soon, with the Fed noting that it will be “patient” and take “considerable time” to increase rates.
The market has rallied on this news, but it’ll be up to oil to carry the momentum into 2015. Assuming we don’t have another major oil gutting over the next week weeks, everything looks to be set for Santa to spread his jolliness to stocks.
By all accounts, oil has settled for now. This comes as oil prices have been cut in half in less than six months. The the market and (more interestingly) oil stocks moved higher last week.
What’s more is that the U.S. economy is still strong and unemployment continues to fall, so why shouldn’t the market trek higher over the next couple weeks? The Santa Claus Rally historically does happen, but the real key is that it doesn’t apply to all stocks and is stronger for certain industries.
Here’s some stocks to consider
Using all the above as a jumping point, here’s some stocks to consider for the Santa Claus rally and beyond. Two sectors of the market that should attract the most money over the next couple weeks includes consumer discretionary and energy.
With gas approaching $2 a gallon, one of the big winners that shouldn’t be overlooked are retailers. Individually, saving $10 or so on a tank of gas doesn’t seem like much, but it adds up quickly. Collectively, households have been saving billions of dollars on the fall in gas prices.
A couple of Wall Street favorites include L Brands (NYSE: LB) and Macy’s (NYSE: M). But for a couple underrated trades, investors should consider Foot Locker (NYSE: FL) and Bed Bath & Beyond (NASDAQ: BBBY).
Foot Locker is the shoe company that seems to be hitting on all cylinders and is likely having a strong holiday season. It’s making headway in opening Lady Foot Locker stores and continues to profit from new Nike (NYSE: NKE) products coming to market.
As far as Bed Bath & Beyond, there’s been speculation in the past that it could be a buyout candidate. And with the recent PetSmart (NASDAQ: PETM) buyout, which is one of the largest retail buyouts in history, Bed Bath & Beyond could be back in focus. Regardless, Bed Bath & Beyond is a still a free cash flow generating machine, where consumers are turning to the retailer as a cheap way to spruce up their homes.
Then of course, everyone wants to talk about energy.
The energy sector is trading at a price-to-earnings ratio of just 11. Meanwhile, the S&P 500 trades at 20. Relative to the S&P 500, the energy sector has only been this cheap a few times in history. For investors that are using the selloff as a buying opportunity in the sector, it’s best to stick to the highest-quality names.
First up is Schlumberger (NYSE: SLB). As an oilfield service and products company, it’s diversified across various oil and gas companies. And even with oil prices at $55 a barrel, certain companies will still be drilling.
Halliburton Company (NYSE: HAL) is another interesting oil field services company. Shares are down 40% over the last six months, more than double Schlumberger’s fall. But with the acquisition of Baker Hughes (NYSE: BHI), it’ll become the largest player in the industry.
Another idea in the energy space is one of the largest oil and gas production companies in the world, EOG Resources (NYSE: EOG). But the really great thing is that EOG focuses on onshore natural gas production in North America. Its business is insulated from overseas turmoil (think: Russia) and more volatile drilling environments (think: offshore).
EOG also has a stake in some of the most lucrative shale plays in the U.S., including the Permian Basin, the Bakken and the Eagle Ford Shale. And with a 33% debt-to-equity ratio, EOG also has one of the better balance sheets around.
Santa isn’t just for kids. Studious investors can make Santa work for them during the upcoming holidays. Not to condone short-term trading, but even if you just buy a market index fund, there’s a good chance it’s heading higher over the next couple weeks.
Marshall Hargrave is the managing partner of Bridgewater Investments LLC
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