January Effect and Turnaround Candidates for 2024: Jarvis® Update January 12, 2024

We've turned the page on 2023 and we're diving headlong into 2024. What themes have us excited in the new year? We answer that question and much more on this week's Jarvis Update. I'm your host, Brian Druss, Director of Research here at Left Brain, joined as always by our CEO and Chief Investment Officer, Nolan Langford. Nolan, Welcome back from Asia.

Thank you, thank you, thank you. Today is, uh, I think day 3 of my return, and, um, I need a nap.

Well, as always, we ask you to like and share the video if you find these videos useful for you, and hit the bell for notifications, and hit the subscribe button. That way you know each time these are out. And we also love to interact with our subscribers and our listeners. We'd ask you to comment with an answer to the question below: When is the date we should stop saying Happy New Year? This is definitely a debate we hear every year. Before we get started, we'll give you a quick preview. So markets have been mixed out of the gate in the first 2 weeks of 2024. We've got 2 topics for you as we usually do. The first is what to make of the January effect, and the second is going to be our turnaround candidates for 2024. Before we jump into that, we're going to give you a few announcements. First of all, we'd like to ask you to sign up for the Jarvis newsletter that comes out on a monthly basis. And we also, if you're on our mailing list, you receive all the other content that we put out. Next week we're going to be out with our first newsletter of the week. So be definitely be on the mailing list and be ready for that. So our goal is working with clients to help them live their best lives. And we think investing in public securities is one of the best ways for investors to achieve this. Uh, whether or not you currently work with an advisor, we'd love to be a resource for you to help you reach your goals through an extensive financial plan that considers all of your circumstances. If you have interest in learning a little bit more about what we do here at Left Brain, call us at the number below, and that for the podcast listeners is 630-547-3316. We've also got something for our institutional investors as well, and we're relaunching our Investment Ideas Service. That's our old research service, that's our Investment Ideas Service now. We're putting forward our model portfolios. We put out 5 model Portfolios every quarter, updated each quarter, and that's got dozens of actionable securities out there for you. So if you're an advisor watching this and you need some ideas to help your clients, this is a great product for you. If you have interest, tomorrow we put out our first update of the year, the Q1 update. And also, if you want to learn more, go to the Investment Ideas section of our website at leftbrainwm.com and the details will be there. First to Market recap. Most of the major averages we follow were up this week. The S&P was up around 2% for the last 5 days of trading. The NASDAQ was up 3%. And then the Russell 2000, that's the growth-oriented index, and those are the smaller stocks, that was down about 0.1%. So lagging considerably. Russell had been outperforming over the last couple of months of 2023. So that's something we're going to keep an eye on this, this year. We had quite a bit of news this week as well. First one was the SEC approved the Bitcoin ETFs. That's something that's been in the works for, it feels like years. We also had the inflation, the latest inflation reading, that, that's the Consumer Price Index, come out. That came out slightly higher than expected. Market didn't really respond very well to that in the initial moments after the number was released, but certainly came back later in Thursday's trading. So that was good to see the market taking that in stride. Interest rates have been creeping up slightly higher since they bottomed on December 27th of last year. The 10-year Treasury went down to 3.78% on that day. We're back a little bit above 4%. So we're a little bit higher on interest rates. That may have something to do with why growth stocks have struggled out of the gate this year. And then the big one, Nolan, this is probably going to catch your eye as well. Earnings season beginning in earnest tomorrow, Friday, with banking earnings. And then we've got a whole slew of earnings over the next 2 or 3 weeks. So, Nolan, I'm going to open it up for you. What's your opening statement here? In our first video of 2024?

Well, what's immediately on my mind is the rash of coaches that have been unceremoniously let go, legendary coaches, in the last 24 hours. So I'm still trying to process and digest that. So that's my first thought. As it relates to the markets, um, you're right, I'm— this is an interesting month for a lot of reasons. January is The most recent thing that occurs to me is, you know, interest rates really drove the markets in 2023, and particularly those last 2 months, you know, when we— the market got wind that Jerome Powell is not only no longer raising rates, but now we have on the table interest rate cuts. That really is what got the markets going in November and December to finish out the year. So here we are. We're kind of sleepwalking through the first 2 weeks of January. We kind of have this December hangover. It's like a big prize fight, right? There's a, like, a big standoff as it gets to the late rounds. You want to kind of see where the momentum, you know, uh, where the momentum is going to go to. Rather, markets will be re-energized and continue to rally. That happened starting in, um, starting in November last year. Or rather, this is sort of going to be a pause for quite some time to kind of see what happens next. So we're kind of in this first 2 weeks of January we had a couple data points come out. Nothing's been really convincing. I think the market's trying to decide whether we're being too aggressive with the projections on interest rate cuts being 4 this year, or rather they're going to start later and maybe not be as aggressive on the interest rate cuts. So I think the market's trying to digest all of that. So that would be one of the things that I'm thinking about. But I'm really interested in the upcoming earnings season. I know we're going to talk about this a little bit later, So that would be my other reaction. I would be very interested to see not only what happens during earnings season, but more importantly, how the market responds to the earnings releases.

Thank you, Nolan, for kicking us off there. We're going to jump right into our topics now. So topic 1, we're calling the January Effect and how should investors use it to their advantage. So, Nolan, the January Effect, just put quite simply, it's a theory that states that stocks that do well in January of a given year they tend to do well for that entire year. We saw that quite a bit last year. Number of names that started out well in January finished out the year quite positively. Nolan, what are your thoughts on the concept? And then maybe give us a few examples from '23 that sort of illustrate the concept.

Januarys for us have always been important. One of the things that we look at when that calendar turns from one year to the next, and investors get to sort of wipe the slate clean from a tax loss, capital gain, capital loss, stock lot— stock market or stock option lockup standpoint. And it turns January 1st, that's a big tell. You know, investors that may have been dumping stocks for non-economic reasons in the prior year, you know, come back to the table January 1st. So I've— we've always watched as a firm what happens in January, and it gives us some ideas to investigate further. Last year we saw right off the bat You know, you seen Meta and Amazon, two of the Magnificent Seven, come right out of the gate last year with, you know, in Meta's case in January was up over 50% in January 2023 and just kept on moving throughout the rest of the year. And even Amazon was up over 20% on the year-to-date starting in January, and these stocks continued to perform magnificently. So this year in January, we're going to be watching the exact same thing. These stocks that get off to a fast start, we want to understand what, what's happened, what's happening, what investors are thinking, and investigate whether it's likely to continue.

Excellent, Nolan. We will definitely keep an eye on the winners this month. This year, in the first few trading days— now, this is not dispositive of the entire month, of course— but we've seen smaller growth stocks struggle a little bit, but we've seen some large-cap names really out of the chute doing quite well. We've seen CrowdStrike, that's CRWD. We've seen Nvidia again. A darling of last year, NVDA doing well again right out of the chute this year. And then Eli Lilly, LLY, those are all really strong. So those are ones that we'd probably keep an eye on and see if it's going to follow through. How are you applying the theory for 2024, Nolan, and what are you looking for in the next 20 days?

So again, it's going to be all about earnings. And as you mentioned, the banks come out first. They come out here in the next day or so. Then we have a little bit of a lull, and a lot of the names that are on our interest list, you know, you're really looking at the last week of January, first week of February before we get those barrage of earnings. So I'm just really going to be paying attention to these com— uh, the comments coming out from CEOs. You know, it's one thing to turn on the CNBC or the evening news to hear the latest economic reports, something completely different when you hear George Gert Kers talking about cybersecurity and what, um, CIO budgets look like and the demand drivers for products and services up to the minute. And so I'll be paying attention to that, particularly companies that beat and raise. You know, last year wasn't a big earnings growth year. And as a matter of fact, as we listened, a common theme that we heard throughout 2023 was companies lowering expectations and numbers. They really took the occasion of a soft economy and macro concerns returns to really lower the bar. So now we're into that lowered bar year. We should start to see a lot of beaten raises. And so I'm going to be watching the stock reactions to surprise upside beats.

Absolutely, that sounds great. We will be looking for that in the next few weeks. With that, let's move to topic 2. So topic 2 is our turnaround candidates for 2024, a little bit of the opposite end of the spectrum of what we were talking about in the last topic. So last year was a strong year for stocks after a bear market in 2021, 2022, and that was dominated mostly by tech last year. We went back, did some work this week analyzing the returns for the last year, but also the last 3 to 5 years, and two major sectors stood out as laggards. Those were healthcare and financials. Um, Nolan, can you talk about your thoughts on some of the best turnaround sectors and why those might be on your radar this year?

Well, if you take a look at markets, they tend to kind of go through these, these waves or these cycles, if you will. Generally, you, you're looking at categories of investments or sectors that fall out of favor for some period of time. Uh, investors tend to ignore them, prices tend to be cheap, or the stocks at the time don't have a lot of buyers. That makes or forces the company to do something dramatic to try to get the stock going. And generally, when these companies start reporting better results, because they've been sold a lot, buyers tend to rush back in. The stocks can gap up, and you can do very well. It's definitely something we want to pay attention to. We want to be not necessarily the earliest on a trend, but we certainly want to pay attention to it when a trend starts. When a company starts multiple quarters of improved results, you certainly want to take notice because if you pick them right, you can do very well by earning those shares, owning those shares.

Excellent. Let's jump right into the practice of things here, Nolan. Within those sectors that you like coming out of, out of last year, what are some of your favorite potential turnaround plays here this year?

Yeah, I'm going to give you a couple. First one is biotech. A lot happening in healthcare right now. So for some reason, what really surprised us is the weakness in healthcare last year. Was unbelievable, was pronounced. And for biotech companies— and again, these are generally early-stage drug discovery companies, so not a lot of reported earnings— and as we know, this is a category of stocks that really have been pounded because of what's been going on with interest rates. And biotech, if you look over the last 3 or 5 years, I mean, they've been one of the worst-performing sectors. But things look to be changing. There's some blockbuster drugs that have come on the market. Big Pharma, you know, the Pfizers of the world, where they have to replenish their pipeline because of patent expirations. And so they need growth. And so it looks like now you're gonna start to see some of these big companies with slow growth and lots of cash buying some of these younger companies with attractive pipelines and no cash. And so we've already started to see a couple of deals in the sector. I expect that to be a catalyst. I think valuations are cheaper than they've been in a very long time. And outside of tech, biotech has my interest, and it's number one on my list for turnaround categories.

Excellent. Yes, we think healthcare, it, it has a lot of room to run. Uh, healthcare— S&P healthcare sector was up less than 1% last year. In a market that was up over 20% overall. So very interesting there. A lot to be interested about in healthcare. We've got the weight loss drugs, we've got a lot of other drugs in the pipeline. So that's somewhere that we're going to be watching as well. With that, Nolan, we'll close up the investment portion of the program. But we've got the big game coming up on Saturday night on Peacock. Your Miami Dolphins visiting my Kansas City Chiefs. Hoping they're going to be able to stay warm in the cold confines of Arrowhead Stadium. What are your thoughts, Nolan?

My Dolphins have had pretty good practice in the cold weather. It got down to 60 degrees this week here in Miami, so I think they'll be ready.

We're going to be keeping our fingers crossed for the below-zero temperatures and those, uh, those Miami Dolphins shriveling up in the cold of Kansas City. So We'll see how that turns out, and we will see you again next time. Thanks, Nolan.

Happy New Year, everybody!