MicroCap Seasonality

I stumbled upon an interesting article involing the performance of microcap stocks in January. Mark Hulburt from Barrons crunched data provided by two finance professors, French and Fama, from 1926 to 2004 to see if microcap stocks really outperform large cap. The average return of the stocks in the portfolio containing the smallest-cap stocks was 17.1% on an annualized basis between mid-1926 and the end of 2005, versus 10.2% for the quintile that had the largest-capitalization stocks -- for an impressive difference of 6.9 percentage points annually.

However, when you drill down further into the data, you find that the bulk of the microcap return occurs in January. Here are the details.

Here are the annualized micro-cap returns by month from July 1926 to December 2004:

January.........159.82%
February.........25.10%
March...............1.21%
April................12.86%
May...................6.85%
June..................6.57%
July.................22.64%
August.............8.16%
September.......-7.75%
October..........-14.60%
November..........7.97%
December.........-1.94%

So, armed with this information, what investment/trading options do you have? There are a few.

1) Purchase shares of IWC
2) Purchase Januray calls for IWC (IWCAZ.X, IWCAC.X or IWCAD.X)
3) Purchase any number of small cap funds

We hold no position in any of the above.

Here is a link to the original article.

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