It’s that time of year when the Santa Claus rally is on the cusp of starting. Few can believe that the best is yet to come, at least if history repeats, based on the run up in the market since the beginning of November.
On October 27, the S&P 500 was trading at 4,117 and yet by mid-December it had risen all the way to 4,700 and beyond.
Of course, that pace of increase is unsustainable, but often before a correction, a final whoosh to the upside takes place, and no better time for a final bullish run than Christmas.
So what stocks do best during this Santa Claus rally period?
Stocks That Go Up During Santa Claus Rally
The key to successful trading is playing the odds. No stock is guaranteed to rise or fall at any given time but strange patterns do emerge from time to time, and so a keen focus on data is helpful to making more informed decisions.
Take for example the case of James Hardie Industries (NYSE:JHX), a company that specializes in the manufacture and sale of fiber cement and bonded building products.
It’s not clear why such a company would have a tendency to run up over the next two weeks, and yet it does.
Astonishingly in 21 of the past 22 years, JHX has risen by an average 5.3% through to the end of the year.
Another stock with a strong seasonal track record during the holiday season is Westlake Chemical (NYSE:WLKP).
Again, this is a firm that defies logic as to why it has such a strong history of rising at this time of year, but the data cannot be disputed.
Over the past 19 years, 88% of the time WLKP share price has risen by as much as 10.2% over the two week period.
One stock that most investors won’t have heard of but which has a remarkable track record rivaling that of Westlake Chemical is Varonis (NASDAQ:VRNS), which tends to rise by an average of 6.92%.
It’s perhaps not surprising that a cybersecurity firm is a popular play at a time when seasonal shopping is at a peak but it’s not entirely intuitive to figure out precisely why in 8 of the 9 past years, the share price has run up exactly at this time.
It’s worth adding the caveat that Varonis appears substantially overvalued on a fundamental basis with analysts pegging fair value at $38.61 per share. If VRNS share price does enjoy a bull run during the Santa Claus rally as it has in most of the past years it’s been publicly traded, perhaps don’t expect a whole lot more out of it thereafter.
Next on the list of top stocks that tend to go up during the holiday period is Axsome Therapeutics (NASDAQ:AXSM), a company developing novel therapies for the central nervous system.
Again, it’s an unlikely and unintuitive candidate but its historical track record is difficult to dispute, rising in 8 of the 9 past years over the coming two week period. On average, the gain over that time frame has been an impressive 8.92%.
On a valuation basis, Axsome is also looking a little stretched with downside risk of 2% on a discounted cash flow forecast basis.
A therapeutics company valuation is largely based on future drug developments, much more so than present cash flows extrapolated in time, and so it’s not entirely surprising to see that analysts are much more bullish with a $114.92 per share consensus target.
Last on the list is Merus (NASDAQ:MRUS), a clinical stage immuno-oncology firm that has a track record of rising by 16.6% with 85.7% accuracy over the coming couple of weeks.
Although it’s trading in the mid-$20 per share level, analysts estimate that it could rise to as high as $43.70 per share, though typically that kind of bullishness is predicated on successful clinical trials.
In its favor, Merus has more cash than debt on its balance sheet and forecasts sales growth this year. Offsetting those pluses are a few minuses, including weak gross profit margins and a high revenue multiple.
The focus in the short-term, however, is less on the fundamentals and more on the momentum the stock has shown at this time of year more often than not. Time will tell if history echoes and repeats.
What Stocks Go Up During Christmas?
Stocks with strong seasonal track records tend go up during Christmas, such as James Hardie Industries, Westlake Chemical, and Varonis.
Other stocks that have demonstrated impressive share price performance during the final two weeks of the year encompassing the Santa Claus rally are Axsome Therapeutics and Merus.
Although certain stocks have a historical track record of rising at this time of year, it cannot be overstated that a primary reason for the share price hikes stems from the flows of capital at the end of year originating from re-collateralization.
As new capital is put to work in January 2024 following enormous gains in 2023, other flows of capital attempt to anticipate and cause a pop into year-end, which is commonly referred to as the Santa Claus rally.
That bullishness is likely to continue into mid-January if history repeats, potentially leading to a blow-off top before a correction that could follow by February.
Whether that pattern repeats or not is still to be determined, but the flows of capital through October, November and December would suggest the capital flows are rhyming with those seen in past years.
The probabilities favor being long into mid-January and scaling back thereafter to protect gains. With that said, timing the market is notoriously difficult, so as always playing the trend is the smartest strategy.
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