40 Stocks to Watch as Window-Dressing Season Kicks Off

Window dressing can cause outperforming stocks to rise even higher, and underperformers to drop further

Dec 1, 2016 at 12:51 PM
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Just before the end of each quarter, portfolio managers tend to make some changes to their investments, picking up outperforming stocks and ditching underperformers, in preparation for divulging their holdings. In doing so, they can give the impression they've been picking great stocks all along. This process is known as "window dressing," and it can cause strong-performing stocks to tack on extra gains, while poor performers can come under extra pressure. With the month of December beginning, the fourth quarter and the year are wrapping up, making this a key time for window dressing effects to occur.

Schaeffer's Senior Quantitative Analyst Rocky White has compiled data on how some of the best and worst stocks through the end of November tend to fare during December to see whether the window dressing phenomenon has had an observable effect in recent years. The tables below examine all optionable stocks with open interest of at least 5,000 contracts within the front three-months' series. They compare the top 100 stocks, based on year-to-date returns through November, with the worst 100 stocks, as well as the others.

As you can see below, the trend has played out clearly over the past three years, with the top 100 stocks sporting higher December returns (relative to the other groups), and the bottom 100 underperforming. Likewise, over the same time span, the best stocks leading up to December have been far more likely to outperform the broader S&P 500 Index (SPX) than the worst year-to-date performers.

Stock Average December Returns Dec 1 Stocks Beating SPX in December Dec 1

Interestingly, this trend seems to be less pronounced among SPX components. The tables below compare the same data across SPX stocks only, comparing the best 50 and worst 50 stocks heading into December. It's possible the lack of clear window dressing effects is because SPX stocks tend to be widely held by funds regardless of performance. Or it could reflect a balance between profit-taking on outperformers and buying into underperformers at attractive price points.

SPX Average December Returns Dec 1

SPX Stocks Beating SPX in December Dec 1

Regardless, the next two tables list specific stocks that could be most affected by window dressing this month. Among the 20 top year-to-date performers is steel stock AK Steel Holding Corporation (NYSE:AKS), which had roughly quadrupled as of Wednesday's close. Meanwhile, drugmaker Valeant Pharmaceuticals Intl Inc (NYSE:VRX) tops the list of the 20 worst stocks, dropping 83.1% in 2016.

Best YTD Stocks Dec 1 Worst YTD Stocks Dec 1

AKS hit a two-year high of $9.50 earlier this week, and is up 3.2% at $9.42 today. The shares have been rallying hard since November's presidential election results, with Donald Trump's surprise victory perceived as a boon for manufacturing, as well as basic materials and metals. Despite recent gains, the stock could have more room to run, as short interest represents 20% of AKS' available float -- hinting at a potential short-squeeze. What's more, AK Steel Holding Corporation is historically one of the best-performing small-cap stocks in the month of December,

Conversely, VRX tumbled yesterday on an M&A flop, and is down another 1.3% at $15.58 today. Understandably, the stock has been surrounded by skepticism. At present, 11 out of 14 analysts call Valeant Pharmaceuticals Intl Inc a "hold" or a "strong sell," while nearly 10% of the equity's total float is wrapped up in short interest.

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