20 Small-Cap Stocks That Could Pop in December

AK Steel Holding Corporation (NYSE:AKS) and Wendys Co (NASDAQ:WEN) have historically outperformed in December

by Kirra Fedyszyn

Published on Nov 29, 2016 at 3:48 PM

U.S. stocks have been on a tear since the presidential election earlier this month, and small caps have been no exception. In fact, the Russell 2000 Index (RUT) -- the benchmark for small-cap stocks -- yesterday snapped a 15-day winning streak. To put this in context, that marks the RUT's longest win streak since 1996, and the index has posted larger winning streaks just twice since 1985. Notably, these extended winning streaks have historically been bullish indicators for small caps in the weeks and months ahead.

Today, we've been checking in on stocks that have historically outperformed during the month of December. The table below lists 20 of the top performing small-cap stocks in December over the past 10 years. Data is courtesy of Schaeffer's Senior Quantitative Analyst Rocky White, and includes only stocks that have options, trade at least one million shares per day, closed Monday above $7 per share, and have a market cap less than $5 billion. Among the names of interest on the list are steel stock AK Steel Holding Corporation (NYSE:AKS) and restaurant chain Wendys Co (NASDAQ:WEN).

Best December Small Cap Stocks November 29

Over the past 10 years, AKS has turned in a positive December return eight times. Even more impressive, the shares have posted an average return of 10.6% for the month. After barreling higher on the charts over the past month, the stock is 1.9% lower today at $8.93, amid a sharp drop in Chinese iron ore prices and mixed brokerage attention. Specifically, the shares broke out above their former annual highs around the $7 level just days after the U.S. presidential election -- tagging a fresh two-year peak of $9.50 yesterday -- and are now up 300% year-to-date. However, this round-number year-to-date percentage return and AKS' overbought 14-day Relative Strength Index (RSI) of 76.5 suggests a near-term breather may be in the cards.

All that said, the stock's sentiment background suggests AKS still has plenty of room to run. The majority of analysts covering the security rate it a "hold" or "strong sell," and the average 12-month price target sits well underfoot, at $7.44. And while Macquarie earlier raised its price target on AKS to $9 from $6.80, it also downgraded the stock to "neutral." In other words, the door is wide open for upgrades and/or price-target hikes, which could help buoy the shares. Plus, 20% of the stock's available float is wrapped up in short interest, even after these pessimistic bets dropped by 31.3% in the last two reporting periods, leaving ample sideline cash to help fuel the equity's fire.

An unwinding of bearish attention in the options pits could also be a boon for AKS. The equity's 50-day put/call volume ratio at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) sits at 0.46 -- call-skewed on an absolute basis, but higher than 81% of the past year's readings. Plus, it's an attractive time to purchase premium on AK Steel Holding Corporation's short-term options, as the security's Schaeffer's Volatility Index (SVI) of 68% -- in the 12th annual percentile -- suggests low volatility expectations are being priced in. Meanwhile, AKS' Schaeffer's Volatility Scorecard (SVS) of 89 indicates the options market has been underpricing the stock's ability to make big moves over the last year.

WEN has had a strong 2016 -- up nearly 20%, and tapping a nine-year high of $13.16 on Monday. If past is precedent, the stock could be on its way to higher highs. Over the past 10 years, WEN has had a positive December nine times, and returned an average of 5.9% for the month. The shares are 0.2% higher at $12.88 today, as a price-target hike to $11.50 from $10.50 at Credit Suisse overshadows a downgrade to "neutral" from "buy" at Goldman Sachs, which also removed WEN from its "Americas Buy" list.

Wendys could have plenty of fuel left to keep its rally alive, too. Roughly two-thirds of covering analysts call the stock a "hold" or worse, and the 12-month consensus price target of $12.12 represents a discount to WEN's current trading levels. Meanwhile, short interest jumped 20.9% in the most recent reporting period, and now accounts for 22.3% of the equity's available float. At WEN's typical pace of trading, it would take more than seven days to buy back all those bearish bets. Bullish brokerage notes and/or a round of short covering could translate into a fresh burst of buying power.

WEN also has a bearish bias in its options pits, though volume tends to be light on an absolute basis. At the ISE, CBOE, and PHLX, the stock's 50-day put/call volume ratio of 0.68 ranks higher than 98% of comparable readings from the last 12 months. Echoing this, WEN's top-heavy Schaeffer's put/call open interest ratio (SOIR) of 6.99 is docked at an annual high, meaning short-term speculators are more put-heavy now toward the stock than they've been at any other point during the past year. Finally, Wendys Co's near-terms options are also well-priced from a volatility standpoint, as the stock's SVI of 26% is seated in just the 13th percentile of its annual range.

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