This ‘free lunch’ stock trade into year-end has typically netted a 10% return

Published Tue, Dec 19 20239:45 AM ESTUpdated Tue, Dec 19 202311:54 AM EST

Holiday shopping time is running out, but now is the perfect time to go bargain hunting in the stock market, according to the Stock Trader's Almanac. A recent note from Almanac editor Jeffrey Hirsch highlighted 13 stocks that fall into his latest short-term "Free Lunch" strategy, which focuses on buying stocks that reached a new 52-week low on one specific day this month: last Friday, Dec. 15, when stock options and index futures expired. The Almanac's Free Lunch strategy has been profitable 75% of the time since the late 1990s, working in 18 of the past 24 years, with the average basket climbing 10.5% in two months. "We have found that the most opportune time to compile our list is on the Friday of December quarterly options and index futures expiration — AKA Triple Witching Day," Hirsch said. Buying tax loss selling losers These stocks are often driven down to rock-bottom prices as investors offload their losers in December to capture tax losses that can be used next spring when returns are filed with the IRS, Hirsch said. But stocks that end the year in the red don't always stay there. "Our research has shown that NYSE stocks trading at a new 52-week low on or about December 15 will usually outperform the market by February 15 in the following year," the editor wrote. Some of the subsequent rally can be attributed to the fact that Hirsch's strategy takes advantage of several year-end patterns, such as the bullish Santa Claus rally. "The stocks selected are usually technically, deeply oversold and poised for a bounce — dead cat or otherwise," he said. The editor also noted many of the stocks he includes are either small or medium cap, which generally benefit from the January Effect . This is a phenomenon where small-cap stocks tend to outperform large-cap names from mid-December to February, he wrote. Stocks included in this year's Free Lunch strategy had to meet other criteria, such as selling for $1 or more per share with average daily trading volume of at least 50,000 shares over the past 50 days. Companies also had to possess a minimum market capitalization of $50 million. Stocks also had to have fallen at least 30% from their 52-week highs, and trading volume on Dec. 15 had to total at least 1.5 times the 50-day daily average. Chocolate manufacturer Hershey was included on the list. The average analyst covering the stock has a hold rating and sees 16% upside for the Reese's maker, according to data from LSEG, formerly known as Refinitiv. Hershey is down 21% in 2023 and closed 34% below its 52-week high on Dec. 15. Bank of America downgraded Hershey to neutral from buy earlier this month, citing limited upside potential in 2024. Piper Sandler did the same in November, citing rising cocoa costs as an obstacle to fatter profits. Also included was boron and lithium company 5E Advanced Materials , down 80% in 2023 and 88% from its 52-week high on Dec. 15. Aadi Bioscience , 374Water and Eagle Pharmaceuticals were also down 80% or more from their 52-week highs on Dec. 15. "Our suggested guidelines for trading these Free Lunch stocks are to initiate a position at a price no greater or less than 3% of Friday's closing price and to implement a 15% trailing stop on a closing basis from the purchase price," Hirsch wrote. The Almanac added that the most opportune time to buy into these positions is before year-end, and positions should be exited whenever they result in a sizable gain or trigger a stop loss, and starting in the middle of January and no later than mid-February.