Beaten-down small caps tend to surge in the new year. Here are a dozen smaller stocks held by billionaires like Mario Gabelli with good prospects for better times in 2024.
For more than 50 years, Mario Gabelli has maintained a rigorous stock-market investing discipline that transformed him from just another smart kid from the Bronx into one of the world’s most prominent billionaire investors and money managers. The process for the 81-year-old Gabelli starts with a deep dive into a company’s financial statements, followed by talks with suppliers, customers and competitors, as well as face-to-face meetings with management. He was on the road to Melville, N.Y. for such a meeting less than one week before Christmas and eager to kill time in Long Island traffic talking about the January effect—the propensity for stocks to produce outsized gains during the month of January.
Typically associated with smaller stocks and those that have incurred big recent losses, the bullish tendency of stocks in the first month of the year is sometimes explained by tax-loss selling before year’s end and subsequent bargain hunting by investors in the new year.
“As the year winds down, people talk to their tax guy and say that they want to realize some of the big gains they’ve made in stocks, and their tax guy points out the tax impact and tells them to look at their portfolio to find some of their losers where they can realize unrealized losses,” says Gabelli. “That’s going on fairly extensively now as people look to lock in gains on ‘magnificent seven’ stocks, for example, and harvest losses from things that didn’t work out.”
That’s a logical explanation, but historical returns around the globe show that January buoyancy occurs even in stock markets of countries with different tax calendars, or no capital gains taxes at all, so there is more at work than just tax-loss harvesting.
“Another major factor is cosmetics, or the so-called ‘window-dressing’ phenomenon,” says Gabelli. “Mutual funds don’t want to be stuck with a bunch of big losers that they need to list among holdings in reports that they send to their investors, so they get rid of them before the end of the year.”
The January effect was first documented in the year that Gabelli was born. In 1942, 24-year old New York University economics and statistics student Sidney B. Wachtel wrote an article titled, “Certain Observations on Seasonal Movements in Stock Prices,” published in The Journal of Business of the University of Chicago. Wachtel, who went on to a career in investment banking and served as a Treasury Department economist under President Eisenhower, chronicled a persistent bullish bias for stocks between December and January for the 1927-1941 period.
In 1976, a generation after Wachtel’s initial study of January returns, Michael Rozeff and Willian Kinney, Jr. added more empirical and academic heft to the January effect, showing that the average monthly returns from 1904-74 for an equally weighted index of New York Stock Exchange stocks was 3.48% in January, compared to 0.42% for the remaining 11 months of the year. Subsequent research showed that the January effect was more of a small cap affair, because Rozeff and Kinney were looking at equal-weighted indices, as opposed to market capitalization weighted ones in which large caps factor much more heavily in returns.
The thing about market phenomena is that once they are widely known, the tradeable edge for investors tends to dissipate or accelerate, especially with algorithmic and high-frequency systems gaining an ever-larger share of stock market trading volume. Elongation and distortion of the effect just might be the case in 2023.
Small cap stock indices bottomed out with the rest of the market on October 27 and have rebounded mightily since then. From the beginning of the year through the October nadir, the Russell 2000 Small Cap Index was down 5.9% but soared 23.9% over the next eight weeks. The S&P SmallCap 600 Index was down 6.3% and jumped 23.5% over the same stretch.
“This has been a massive rally,” says Louis Navellier, founder and chief investment officer of Navellier & Associates. “The regional banks are running, the REITs are running, everything is running.”
Small caps started the celebration early this year, and this is not a new thing since the 1990s. Waiting for a January rebound would have meant missing out on big gains since interest rates topped out two months ago and stocks plumbed their lows. In fact, the month of January over the past three decades has not been exceptionally positive for small cap returns in the way that November and December have been since 1994.
January Small Cap Party Starts Early, Goes Late
“Dating back to 1994, January is actually the third weakest month for small caps, on average,” notes Raymond James Chief Investment Officer Larry Adam, who also points out that February seems to be the winter month when small caps shine brightest versus their bigger public company brethren. “Interestingly, small caps underperform large caps in January and March but outperform large caps in February,” says Adam.
Find The ‘January Effect’ In December And February
Even more revealing over the past 30 years is that the S&P 600 is more likely to produce positive returns in January on the heels of a winning year for the small cap index, while down years tend to beget negative January performance in the new year.
“When the previous year was negative for small caps, which could trigger tax loss harvesting, the average following January return was much weaker than January returns following a positive year for small caps,” says Adam. “In other words, continuing momentum is more likely than tax loss harvesting and subsequent buying to trigger a reversal.”
Momentum More Important Than Big Bargains
Small caps without doubt have positive momentum in their favor going into the end of 2023, but that doesn’t discount the potential impact of tax-loss harvesting, even though it may have been accelerated into October this year, according to Adam’s analysis.
“For today’s context, we separated all stocks in the S&P 600 into quintiles based on year-to-date performance through October 31, and then measured average performance by quintile from October 31 until now,” says Adam. “The worst small cap YTD performers in the first quintile have rallied significantly in November and December, which shows that macroeconomic developments like Fed policy, interest rates and economic trajectory have been much more powerful for performance than the traditional ‘January effect.’”
With the major resurrection of down-and-out small caps since the stock market lows, it would seem wise to consider smaller companies that were down in price at least as much as the small cap indices through October 27. Those displaying exceptional relative strength over the past eight weeks also merit consideration, given the tendency of momentum to extend into the new year, and those that remain down on the year are worth a look due to potential rebounds from artificially low valuations inspired by tax-loss harvesting or window-dressing activity. Based on these parameters, you can find 12 small caps below with potential for outsized returns in 2024 that are owned by Gabelli and/or his fellow billionaire investors according to the most recent SEC filings (stock data is as of December 20, 2023).
Buying Into The January Effect With Billionaires
Television station owners are ripe for a major rebound, according to Gabelli. “The owned-and-operated broadcasters had a rough time in 2023, but in 2024 you’ll see a major upsurge in political advertising which will be a tsunami compared to what we saw four years ago,” says Gabelli, who favors Maryland-based Sinclair (SBGI), owner of 185 stations in 86 markets across the country. “They bought the Diamond Sports Network, which has been less than optimal for their financial performance, but Amazon is in talks to buy at least a big part of it, so you get a double play with Sinclair between the potential sale of Diamond Sports and the uptick in political advertising.”
Another media property catching Gabelli’s eye, and his money, is Grupo Televisa SAB (TV), the largest telecommunication firm in Mexico whose networks pass 20 million Mexican homes and provide broadband service to 6 million customers. Grupo Televisa is also one of the largest pay-television providers in Mexico, with more than 4 million customers, plus it holds a majority stake in Sky Mexico and a 45% interest in Univision.
“If you’re reading the press, Democrats are losing their edge versus Republicans among the Latino population, which is 18% of the electorate and the largest segment of the U.S. population,” says Gabelli. “You can expect major advertising spending in 2024 as the political parties battle over this valuable group of voters.”
Richmond, Virginia-based Tredegar (TG) is another small-cap Gabelli buy. “Housing starts, along with permits, underscore the high degree of pent-up demand for single family homes, although multi-family not as much.” Says Gabelli. “Tredegar’s subsidiary, Bonnell Aluminum, makes aluminum for siding, primarily commercial but also with a big presence in residential, and it’s also selling business in Brazil which will reduce debt.”
Seven prominent billionaire investors, including Ken Griffin and Cliff Asness, hold a stake in Omaha, Neb.-based Lindsay Corp. (LNN), a maker of agricultural hoses, sprinklers, and irrigation systems. It also has a smaller business (13% of revenue) that develops and distributes transportation infrastructure products, most notably its Road Zipper equipment which quickly moves roadway barriers to change traffic flow patterns and accommodate rush hour shifts on bridges, tunnels, and other roads.
Lindsay shares trade at substantial discounts to historical multiples of price to earnings, sales, book value and cash flow. It boasts a sterling history of rising dividends dating back to 1996. Since 2014, it has grown the quarterly dividend 3% annually and most recently boosted the payout to $0.35 from $0.34 earlier this year. It also is a prodigious producer of free cash flow, which totaled $9.12 per share over the past 12 months, offering plenty of room for further dividend hikes, stock buybacks, and potential acquisitions.
Besides stocks held by Gabelli, other small caps show high levels of billionaire interest. Hanover, Pennsylvania-based Utz Brands (UTZ) dates back to 1921 and went public in 2018. The company manufactures, markets, and distributes a broad array of salty snacks that include potato chips, pretzels, cheese, veggies, and pork skins. Brands include Utz, Zapp’s, Golden Flake, Good Health, Boulder Canyon and Hawaiian.
The focus of the Utz’s business in recent years has been penetrating new geographic markets, and it made a major leap in 2021 when Florida-based Publix began stocking Utz products in its stores. It also made strides in the Chicago area by purchasing two distributors.
Prominent billionaire investors have shown an appetite for Utz. Millennium Management, headed by Israel Englander, initiated a new position of 661,000 shares in September at $15.34 apiece, currently worth $9.7 million, or 0.81% of outstanding shares. Also in the third quarter, Jim Simons’ Renaissance Technologies added 182,000 shares for a total stake of 473,000 shares. Jeffrey Yass and Ken Griffin hold smaller positions in Utz.
Both Utz and Lindsay were added to the Forbes Billionaire Investor Small- and Mid-Cap portfolio in the past month.
John Dobosz is editor of Forbes Dividend Investor, Forbes Billionaire Investor and Forbes Premium Income Report.