20 Small-Cap Stocks to Buy Puts On In December

While oil stocks Enerplus Corp (USA) (NYSE:ERF) and SM Energy Co (NYSE:SM) are hot today, the small-caps have historically underperformed in December

Nov 30, 2016 at 11:09 AM
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The Russell 2000 Index (RUT) has been red-hot recently, as small-cap stocks have outpaced the broader market. Yesterday, in fact, we highlighted a number of small-cap stocks that may be smart buys ahead of December, due to historic trends. However, there are also plenty of small-cap stocks -- not to mention, these 25 large-caps -- that investors may want to buy puts on next month, according to Schaeffer's Senior Quantitative Analyst Rocky White, given their tendency to underperform.

Below is a table listing the 20 worst small-cap stocks (i.e., market cap less than $5 billion) for December over the past decade, courtesy of White. To qualify, each stock has to have options and trade at least one million shares per day, and have closed Monday above $7 per share. While it seems strange to say this on a day when the energy sector is booming on an OPEC breakthrough, oil service and oil stocks account for 40% of the underperformers list. Below, we'll be focusing on Enerplus Corp (USA) (NYSE:ERF) and SM Energy Co (NYSE:SM).

worst december small caps nov 30

At last check, ERF has jumped over 15% to trade at $8.50, and earlier touched an annual high of $8.65, riding atop the aforementioned OPEC tailwinds. If past is prologue, however, the shares could headed for choppy trading in the month ahead. Over the last 10 years, ERF has been the worst small-cap stock in December -- finishing higher just twice, and averaging a loss of 8.3%.

Another bad December could rattle bullish options traders. While volume has been light over the past two weeks at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the fact remains speculators have bought to open 10 times as many ERF calls as puts. Underscoring the prevailing call-skew, the stock's Schaeffer's put/call open interest ratio (SOIR) of 0.22 rests in the low 20th annual percentile, with short-term calls outstripping puts by a nearly 5-to-1 margin.

That said, amid today's breakout, it's safe to say that short sellers dodged a bullet. Over the last two reporting periods, short interest on Enerplus Corp dropped 35.6%, and now accounts for only 1.3% of the stock's total float.

Turning to SM, the shares have rocketed nearly 20% to trade at $38.22. What's more, on a year-to-date basis, the stock is close to doubling in value. However, historically speaking, the odds are stacked against a strong finish to 2016. SM has been positive just four times in the previous 10 Decembers, and on average, has given back 3.8% for the month.

It looks like options traders and short sellers have been gambling on losses for the shares, too. Amid relatively low absolute volume, SM Energy Co sports a 10-day ISE/CBOE/PHLX put/call volume ratio of 1.21, in the bearishly skewed 72nd annual percentile -- though this could also be the work of shareholders protecting paper profits against an unexpected pullback. Meanwhile, 13.7% of the stock's float is sold short, which would take almost a week to buy back, at SM's average daily trading volume.

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