"Twelve Days of Christmas" - 12 companies for the Santa Claus Rally

9:49 AM November 28, 2022

Santa Claus rally - a phenomenon in the stock market, which for many traders has woven a successful Christmas, and with a bit of luck - even spent in some exotic corner in pleasant company. Since mid-October we have seen a dynamic rebound not only on the Warsaw trading floor, but also on foreign trading floors. This raises the question of whether this year's Stock Exchange Santa Claus will bring as a gift a Rally with a continuation of increases over the wall of fear? But will the price slide down the steep slope of the hill that has been building since mid-October, creating an opportunity for pain traders who currently have no or few stocks in their portfolio and are waiting for a discount to ignite a new upward wave? 

Let's take a look at 12 companies that could potentially gain during the Santa Claus Rally (as well as in the months following it), but first three words on what this Rally even is and why it may (or may not) occur.

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What is the Santa Claus Rally and when exactly did it occur?

This phenomenon, named by analyst and creator of Stock Trader's Almanac Yale Hirsch, usually takes place in the last week of December and the first days of January. In some years, the rally takes place over a longer period, beginning on December 14 and lasting more than two weeks. Historically, during the Santa Claus Rally, the S&P 500 has risen by an average of 1.3%, but this does not happen every year, so it is not 100% predictable.

Previous Santa Claus Rallies

Between December 1, 2021 and January 4, 2022, the Santa Claus Rally caused the S&P 500 to rise by 4.98%. A year earlier, between December 1, 2020 and January 4, 2021, the S&P 500 rose 2.56%.

Between 1960 and 2020, Santa Claus rallies occurred about 66.66% of the time. Since 1993, it has occurred 67% of the time, according to Stock Trader's Almanac.

Interestingly, statistically, during bear markets and economic downturns, the rally can be even stronger.

Bear markets

A bear market is generally recognized when the S&P 500 falls more than 20% from its previous bull market peak. This year, the S&P 500 officially fell into a bear market in the week beginning May 16.

Santa Claus rallies in bear markets

A look back at the last three bear markets, starting in 1990.

The three-month recession that took place between July 1990 and October of that year caused the S&P 500 to fall 20.14%. This year, investors were not blessed with a Santa Claus rally and the S&P 500 fell 6.27% between December 17 and January 7.

The bear market that began in 2000, which was triggered by the bursting of the so-called dot.com bubble, lasted as long as 33 months and took place between January 2000 and October 2002. During the holiday season, between December 26, 2000 and January 2, 2001, the S&P 500 rose 2.62%, after which it continued its downward trend. The following year, between December 17 and December 31, the S&P 500 rose 4.47%.

During the recession, which lasted for 17 months from October 2007 to March 2009, there were two Christmas rallies - a 1.32% jump in the week beginning December 17, 2008, and a 6.81% increase in the week beginning December 29, 2008.

Genesis of the phenomenon

  1. Several reasons may underlie the occurrence of the Rally:

  2. Tax optimization, i.e. closing losing positions and reinvesting funds, which occurs in late December.

  3. Receipt of Christmas bonuses, which traders and investors may choose to invest because the bonus is seen as "extra money."

  4. A period driven by retail investors, who tend to be bullish, while Wall Street investors largely spend this period on vacation, away from the stock market.

  5. The expectation that a rally will occur, causing large numbers of traders and investors to buy stocks, resulting in a self-fulfilling prophecy.

"Santa Claus is comming to town"

There have been five holiday periods over the past three recessions, and the Santa Claus Rally occurred during four of those five periods (80% of the time), beating the overall average of 66.66%. 

During those four periods in which a Christmas rally occurred, the S&P 500 rose an average of 3.8%, beating the overall average for Christmas rallies by 2.5%.

Which companies have the best chance of experiencing a Santa Claus Rally this year (and not just in December, but taking advantage of significant stock market discounts, also looking ahead to the next few months?

"Twelve Days of Christmas" - 12 companies for the Santa Claus Rally (and not only)

1.Amazon (AMZN.US)

Christmas is a time for holiday shopping, and increasingly we prefer to buy gifts with a few clicks online, rather than squeeze through crowds of people in shopping malls and stand in lines that last for hours. Hence, Amazon seems to be the obvious choice. In addition to being a leading online retailer, Amazon remains the No. 1 player in cloud computing services through its AWS platform.

Amazon.com's stock enjoyed a fair amount of interest earlier this year after the company's 20-to-1 stock split, but the optimism associated with that announcement quickly faded. AMZN shares are currently trading about 40% below their maximums ii have given back most of their COVID gains. The stock is only marginally higher than it was in the summer of 2018, four years ago.

The stock is valued at a Price/Sales ratio of 1.9. That's lower than the S&P 500, which has a ratio of 2.4. And that could be an attractive entry level in the long term. However, one should keep in the back of one's mind the risk of a recession in 2023.

Source: xStation

2.Alphabet (GOOGL.US)

Like Amazon, Google's parent company Alphabet also recently underwent a 20-for-1 stock split, which took place on July 15. And as with Amazon, the bulls are fighting an uneven battle with the bears. Alphabet shares have fallen by more than a third from their 2021 highs, erasing nearly two years of gains.

Even with this decline, Alphabet's shares are not "cheap" in the strict sense of value, as they are valued at 4.6 times sales. However, this is a significant drop compared to the P/S ratio, which has been hovering around 8 for the past year. And looking at GOOGL's price-to-earnings (P/E) ratio, the stock is trading at not at all exaggerated levels of 19 - times projected earnings.

If ever there was a stock that would justify a high multiplier valuation, it would be Alphabet. Despite the company's massive size, it still enjoyed quarterly revenue growth of 13% last quarter and a fat return on equity (ROE) of nearly 30%.

Source: xStation

3.CD Projekt (CDR.PL)

CD Projekt's stock has been in an uptrend since September 8, 2022, driven by three factors:

First, the improving ratings of the PC version of Cyberpunk and the increase in the number of gamers driven by the premiere of the series on Netflix "Edgerunners" set thematically in the Cyberpunk universe, which premiered on September 13, 2022.

Secondly, the game under the premiere of the Witcher series The Bloodline, which is scheduled to be available on Netflix on December 25, 2022, which may affect sales of The Witcher 3. It is worth recalling that the release of the game in the version for new generation consoles enriched with content inspired by the Witcher series from Netflix is scheduled for December 14, 2022.

Thirdly, the presentation of the company's ambitious product strategy poured hope into the hearts of "Reds" fans, who gave a clear signal that, they plan to further develop the Cyberpunk IP, multi-faceted monetization of the Witcher universe and production of a new game from the AAA segment on the basis of a completely new IP. The strategy for the next one assumes a release by the company.

The above factors give a chance for the sentiment towards the company to continue.

Source: xStation

4.PayPal Holdings (PYPL.US)

Increased sales traffic due to the holiday shopping frenzy favors companies that provide services that rely on cashless transactions, such as PayPal

In addition to PayPal's own named payment system, which is ubiquitous on websites, the company also owns the popular Venmo mobile application. Venmo is the preferred payment app for many young people and is popular among gig workers.

PayPal shares are now down nearly 75% on ATH and valued at 3.4 times sales (C/S). 

Source: xStation

5.Walt Disney (DIS.US)

This year has not been an easy one for Walt Disney. Growing competition in streaming video has made the Disney+ growth story look less compelling. Inflation and labor shortages haven't helped either, as has a bad-looking public image dispute with the state of Florida, in which the company's special tax status was challenged.

However, we should not underestimate the factory of children's dreams. Disney is the first name to appear on the family travel circuit and owns some of the most valuable media properties in history in the Marvel Cinematic Universe and Star Wars.

And after the share price decline, Disney is trading at prices first seen in 2014 and with a P/S ratio of 2.1 and a P/E of 40.1.

It's unclear when the price bottom will occur. But it's not every day you can buy shares of the world's best entertainment company at half the price.

Source: xStation

6.NVIDIA (NVDA.US)

Disrupted supply chains and demand significantly outstripping supply in the chip market is a major source of frustration for manufacturers of everything from cars to home appliances, and is a contributing factor to the inflation hell that is spiraling out of control through 2022. But it also presents an opportunity for leading chipmakers to increase production and take advantage of inflated prices.

Leading GPU maker Nvidia could be of particular interest in this regard, as the chips are key to some of the biggest trends in computing today, including artificial intelligence, autonomous driving and cloud computing. It certainly can't be ruled out. With the recession looming, investments in artificial intelligence and cloud computing could accelerate as a way to reduce labor costs.

Nvidia is highly profitable with an ROE of 34% over the past year and a net margin of 26%.

Source: xStation

7.Lowe's (LOW.US)

New home prices in the U.S. are extremely expensive for a number of reasons, but it really all comes down to supply and demand. The supply of new homes is simply not keeping up with demand due to natural population growth and, interestingly, that the social group commonly referred to as "millenials" has begun to settle down and start families.

At the same time, soaring mortgage rates have made already expensive homes unaffordable for many would-be buyers. But it also creates opportunities for home improvement stores such as Lowe's. Homeowners, especially millenials, are investing in their homes. Fully 75% of millenials started a home improvement project during the pandemic.

On the dividend front, Lowe's raised its dividend by 31% earlier this year. This signals that the company's management believes the company's profits will grow in the future. Companies have a natural tendency to hoard cash, so they usually don't want to part with it by paying dividends unless they see a lot more coming in their place. Lowe's is a Dividend Aristocrat with nearly half a century of uninterrupted payout increases behind it. Source: xStation

8.Home Depot (HD.US)

If you are positive about Lowe's is, it would also be prudent to take a look at their rival Home Depot.

HD's stock has really struggled this year and is now discounted by about 36% from its highs. One can look at this latest setback as a buying opportunity for one of the biggest success stories in U.S. retail history.

Investors fear that inflation - and the higher mortgage rates that come with it - will discourage home buying and major renovation projects.

Home Depot is obviously not immune to this trend. But it's hard to imagine inflation having a significant impact on smaller DIY projects. And the demographic trends supporting the housing market - namely, millenials starting families - are sustainable and should help offset any weakness associated with rising mortgage rates.

Source: xStation

9.Prologis (PLD.US)

As we can see from the dynamic growth of e-commerce as a result of the pandemic, it is inevitable that an increasing percentage of commerce will take place online.

This means that demand for logistics real estate that supports e-commerce is also unstoppable. And that brings us to Prologis, a real estate investment trust (REIT) that specializes in this type of real estate. Prologis owns and operates more than 4,700 buildings with 1 billion square feet of space. And the scale of the investment will be even larger, given that Prologis agreed to acquire its biggest rival in the industrial space, Duke Realty, back in June.

REITs tend to be sensitive to interest rates, and aggressive rate hikes by the Fed certainly haven't helped. However, Prologis' dividend yield of 2.9% is the highest in years, and the company's business prospects are very promising.

Source: xStation

10.Target (TGT.US)

Target is a retailer with a long history of selling necessities to the masses. The company's stock, which at the beginning of the year was heavily laden with household goods, electronics and other items popular during the pandemic, suddenly lost ground as consumers diverted more of their spending to travel, experiences and new office clothes. This forced Target to discount a lot of inventory and reduce orders, which was not a signal of confidence.

And naturally, inflation, which is destroying the economy, has not spared Target or its consumers. Target's costs are rising at a time when its lower- and middle-income consumers are cash-strapped and cannot absorb cost increases on their own.

However, the company is not worried about the outlook for the coming quarters. The company raised its dividend by 20% earlier this year, even as Wall Street panicked over stocks. This tells me that management believes their current troubles are just a roadblock.

Source: xStation

11.Chevron (CVX.US)

The stock nearly doubled in value between September last year and May 2022. Since then, however, their situation has been tough, with the price down about 20% from recent highs.

CVX may seem an unusual choice among the top stocks for the 2022 Santa Claus Rally and beyond. The bull market in energy stocks may be coming to an end, as energy prices have been falling recently and the threat of a recession is potentially depressing demand. Nevertheless, energy stocks remain cheap and undervalued relative to the broad market, and pay some of the highest dividends you can get.

Source: xStation

12.Realty Income (O.US)

Investors in real estate investment trusts are focused on dividend yield, and with bond yields as low as they have been in recent years, many investors have begun to view REITs as a substitute for bonds.

Falling bond yields mean rising bond prices ... and an increase in the price of bond substitutes such as REITs. Of course, the exact opposite happens when yields rise, as they are now. Rising bond yields mean falling bond prices ... and pressure on anything that started out as bonds.

This leads to the conservative retail REIT Realty Income. The company offers a competitive dividend yield of 4.8%, but unlike bond coupons - which never change - Realty Income raises its dividend every year. Realty Income has raised its dividend for an impressive 100 consecutive quarters. 

Realty Income may be the choice not so much in terms of significant stock price appreciation, but receiving a steady stream of dividend income.Source: xStation
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