How a Seasonal Small-Cap Strategy Can Brighten Your Retirement

Matthew Carr By Matthew Carr, Emerging Trends Strategist

Market Trends

We’re here to make money. That’s why we invest.

Now, I’m an adamant believer – as is my friend and colleague Marc Lichtenfeld – that the foundation of our portfolios has to be strong. And that means solid, dividend-paying companies that build our wealth over time… That keep us on track to our retirment goals.

But I also believe we have to have a hybrid mentality to investing. We have to be part trader and part investor. The investor in us is in for the long-term. The trader in us is looking for quick hits – short-term opportunities – to help boost the returns of our portfolio.

Now, a lot of noise is being made out there that investors haven’t made any money in stocks in 10 years. That the indices are basically flat…

We can see from the chart that the S&P 500 and the Nasdaq haven’t made any ground since 2000. And the Dow Jones Industrial Average is up around 23% during that stretch.

Looking at the chart, you could say, “I guess all those other gurus are right, huh? No one made money when you look at it like that.”

But that’s a little misleading don’t you think?

Unless we’re invested heavily in index funds (which I personally am not a fan of), then the truth of the matter is: They’re flat out wrong.

Because we’ve actually been making money. And that’s because we’re investing in individual companies, not broad indices. All you have to do to prove your point is mention Apple (Nasdaq: AAPL).

I mean, while the Nasdaq is flat since 2000, Apple is up 2,613%!

Ask any Apple shareholder if they haven’t made any money in stocks…

The Best Three Months for Stocks

Last week, I talked about my favorite time of the year. And I talked about the seasonality of the oil and natural gas sector. This week, I want to touch on seasonality again – but in a different sector. Not to worry, this sector also has demand that skyrockets during the final third of the year.

We all know it. We’ve all probably been squirreling away what we can to prepare for it… We’re heading towards the biggest consumer spending months of the year: the months filled with Halloween, Thanksgiving and Christmas. And we’re already into the Back-to-School shopping season.

This consuming push – in energy and in retail – during the winter months lays the foundation for the best three months of the year for stocks.

Let’s just take a peek at the Dow Jones Industrial Average returns from the beginning of October to the end of the year…

Dow Jones Industrial

Start

End

Return

Oct 1, 2000 – Dec 31, 2000

10,659.06

10,787.99

1.21%

Oct 1, 2001 – Dec 31, 2001

8,845.97

10,021.50

13.30%

Oct 1, 2002 – Dec 31, 2002

7,593.04

8,341.63

9.86%

Oct 1, 2003 – Dec 31, 2003

9,276.80

10,453.92

12.70%

Oct 1, 2004 – Dec 31, 2004

10,082.04

10,783.01

6.95%

Oct 3, 2005 – Dec 31, 2005

10,569.50

10,717.50

1.40%

Oct 2, 2006 – Dec 31, 2006

11,678.99

12,463.15

6.71%

Oct 1, 2007 – Dec 31, 2007

13,895.71

13,264.82

-4.54%

Oct 1, 2008 – Dec 31, 2008

10,847.40

8,776.39

-19.10%

Oct 1, 2009 – Dec 31, 2009

9,711.60

10,428.05

7.38%

Oct 1, 2010 – Dec 31, 2010

10,789.72

11,577.51

7.30%

Oct 3, 2011 – Dec 31, 2011

10,912.10

12,217.56

11.96%

You can see, the only problems were those pesky global financial collapse and credit crunch years. And in all honesty, 2008 was the worst second half for the markets in several decades.

So, we see there’s a solid track record of performance…

Now, let’s take that knowledge and break it down further. Let’s see how we can make some money. How we can give ourselves a little Christmas bonus.

Use This Ugly Stock to Help You Retire Early

One of my favorite investing strategies to use is based on the seasonality of small-cap stocks.

The strategy is elegant and fairly straightforward. You want to target only the best, most profitable times of the year for small-cap stocks.

So, if we’re talking about back-to-school shopping and Christmas, we’re talking retail.

Let’s keep it simple and just focus on apparel.

If you’ve been in a mall in the last decade, you’ve seen Aeropostale (Nasdaq: ARO) stores. Heck, maybe you’ve even been in one.

Aeropostale sells casual apparel and accessories – principally targeting “tweens” and young teenagers – through its 980 stores in the United States, Canada and Puerto Rico.

Would I recommend holding Aeropostale shares for the long haul? Not really. The stock is too volatile and there’s little benefit to holding it long term… Meaning, there’s no dividend. And roughly 36% of Aeropostale’s competitors offer a dividend.

So, it’s kind of an ugly stock to own.

But from a seasonal viewpoint, this small cap provides a perfect example of what I look for to snag a short-term gain, and compliment my long-term dividend payers.

Just take a look at this chart of Aeropostale’s quarterly revenue…

ARO Quarterly Revenue

The reason why I say this is a perfect example for seasonal small-cap trading is the trend is so smack-you-across-the-face obvious…

There’s no mystery to where its strongest part of the year lies.

We can easily see that in the third quarter, Aeropostale’s revenue makes a huge jump. And then it rises even further in the fourth quarter, with fourth quarter revenue nearly double that of first or second quarter revenue.

To profit on the seasonal small-cap strategy with Aeropostale, all it means is we want to get in during the low-priced times of the year, after second quarter results – which come out in August – but before third quarter results in November.

We can simplify that further and just target October 1 (or the first trading day in October) as an entry point, since that’s generally an attractive time for Aeropostale’s share price. And then we simply hold our shares until after fourth quarter results are released in March of the next year.

So, even though Aeropostale isn’t necessarily a long-term buy and hold, we can still profit by jumping in before revenue spikes and then getting back out before its revenue drops in the first and second quarter.

Here’s what the past 10 years of implementing this strategy looks like…

Aeropostale

Entry Price

Exit Price

Return

Oct 1, 2002 – March 31, 2003

$7.00

$13.25

89.29%

Oct 1, 2003 – March 31 2004

$26.90

$36.26

34.80%

Oct 1, 2004 – March 31, 2005

$26.26

$32.75

24.71%

Oct 3, 2005 – March 31, 2006

$21.25

$30.16

41.93%

Oct 2, 2006 – March 30, 2007

$29.15

$40.23

38.01%

Oct 1, 2007 – March 31, 2008

$19.12

$27.11

41.79%

Oct 1, 2008 – March 31, 2009

$31.90

$26.56

-16.74%

Oct 1, 2009 – March 31, 2010

$28.01*

$28.83*

2.93%*

Oct 1, 2010 – March 31, 2011

$23.55

$24.32

3.27%

Oct 3, 2011 – March 30, 2012

$10.77

$21.62

100.74%

*3:2 Stock Split on March 5, 2010

There aren’t any sure things in investing. But this seasonal trend for the small cap Aeropostale offers an average of a 36% return in the six months from October to March. Again, the only year you would’ve lost out was that brutal period from the end of 2008 through March of 2009. The rest of the time you’d come out ahead. Plus, in the majority of those years you’d be sitting on a pretty nice gain.

Invest for the long term. Let your Perpetual Dividend Raisers do their work. But to meet your retirement goals faster, cultivate a trader’s mentality by looking for short-term opportunities to boost your portfolio returns by adding a seasonal small-cap strategy to your investing toolbox. Over the next several months, I’ll share more of these opportunities.