Free Lunch Update: Check Please, Close Out Remaining Positions
By: Christopher Mistal
February 03, 2015
Our “Free Lunch” (page 112 of Stock Trader’s Almanac 2015) strategy is a short-term trade that takes advantage of several yearend and New Year phenomena. Research has shown that NYSE stocks making new 52-week week lows in mid-December, primarily due to yearend tax-loss selling, tend to outperform the NYSE through mid-February. These stocks are selected ahead of the Santa Claus Rally (page 114 STA15) and approximately near the start of the January Effect (page 110 STA15). 

Many of the stocks selected for the “Free Lunch” trade are down for good reason. Declining revenue and shrinking profits are most common amongst these names while others may have run into legal or accounting trouble. Once a name pops, profits should be taken and conversely if a name continues lower it should be cut loose quickly. This year’s basket was no exception. BIND Therapeutics (BIND) was one of the first stocks to pop when it traded over $10 per share on January 8. It currently trades around $6.65 while Whiting USA Trust I (WHX) did the exact opposite on January 21 when it plunged 71.2%.

Overall, this year’s basket did come up short when compared to the longer-term history of the strategy, but it still outperformed the broader NYSE index over the same period of time. Plus, even including Stratasys’ (SSYS) decline today, the NASDAQ portion of the basket did well, averaging nearly a 14% gain.

[2014 FREE Lunch Menu of Bargain Stocks]

Since the close on December 21, our “Free Lunch” basket of bargain stocks has slipped an average of 0.7% through the close on February 2 compared to a NYSE loss of 2.0%. Today’s market action looks like it will return the overall basket to slightly better than break even. Since the January Effect is largely over and mid-February is rapidly approaching, the time has come to close out the “Free Lunch” trade. Sell ARCO, OXM, SJT, WOR, LOV, BIND, CCIH, HSOL, IMGN, OGXI and SSYS. For tracking purposes, all remaining Free Lunch positions in the Almanac Investor Stock Portfolio will be closed out using today’s closing prices. 

As an alternative to simple dumping names that may still be exhibiting strength, tight trailing stop losses could be used.

Disclosure Note: At press time, officers of the Hirsch Organization, or the accounts they control, held positions in SJT and WLT.