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Want to Play the "Santa Claus" Rally? Buy these 3 Stocks

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Did you know that December is higher more often than any other month? That’s right. Historically, stocks enjoy gains 74% of the time. December is especially strong in pre-election years (like the one we are in now). Since 1950, the S&P 500 Index has gained 2.9% in pre-election year Decembers.

It’s Not Too Late

The Santa Claus rally is often misconstrued as a phenomenon that occurs throughout December. However, historical data suggests that the Santa Claus rally occurred from December 15th until January 5th. In other words, if history serves us well, the Santa Claus rally will begin next Friday.

Zacks Investment Research
Image Source: Ryan Detrick, Carson Investment Research

Window Dressing & Performance Chasing

Performance chasing on Wall Street refers to investors’ tendency to buy assets or securities that have performed well through the year, expecting the trend to continue. This behavior is driven by the fear of missing out on potential gains. Meanwhile, window dressing involves fund managers making last-minute adjustments to their portfolios at the end of a reporting period to create a more favorable appearance. With the Nasdaq 100 ETF ((QQQ - Free Report) ) up nearly 50% year-to-date, the tech-heavy index should benefit from the forces of window dressing and performance chasing.

Finding Stocks to Take Advantage of Santa Clause Phenomenon

Did you know that stocks that have already doubled tend to be the most likely to double again? That’s because, on Wall Street, momentum tends to persist, and strength begets strength. This concept is rooted in the idea that strong-performing stocks attract more attention from investors, leading to increased demand and positive sentiment. As the stock’s momentum builds, more investors become interested, driving further price appreciation in a positive feedback loop. When looking for stocks to play a “Santa Claus” rally, look for the following:

·       A Strong Chart Setup: Regardless of the time of the year, this is a prerequisite for picking a stock.

·       Signficant YTD Gains: The “window dressing” phenomenon occurs in the stocks that have already seen significant price gains.

·       Institutional Favorites: To pile into a stock, institutions require liquidity. Stick to the highly-liquid, institutional quality stocks.

3 Stocks to Ride into Year-End

Super Micro Computer ((SMCI - Free Report) ): Exploit AI Momentum

Super Micro Computer plays a significant role in the AI industry by providing advanced and high-performance computing solutions. Specializing in server technology, Supermicro designs and manufactures server systems, components, and accessories that are widely use in AI and machine learning applications. Their products cater to the demands of data centers and enterprises that require powerful hardware for AI workloads.

SMCI: Everything but the Kitchen Sink

Amid exploding AI demand, SMCI announced a public offering to sell more than $2 million shares of common stock. The proceeds of the offer will be used to support its operations, manufacturing, and R&D needs. Share offerings of this nature are often a short-term negative for a stock because they add more supply to the market. However, the fact that SMCI stock is flat since the offer a bullish sign. Meanwhile, early Monday, SMCI was hit with a downgrade where the analyst put a price target of $160 on the stock (SMCI is currently trading at $260). Again, SMCI absorbed the negative news. The reaction to negative news is often more valuable to investors than the news itself. If the stock can claw back above its 50-day moving average, it should rally strongly into year-end.

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The Zacks “Consensus Estimate Trend” also shows that, as a whole, analysts are becoming more bullish on the stock.

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Image Source: Zacks Investment Research

Carvana ((CVNA - Free Report) ): Reversion to the Mean

Carvana is an online automotive retail platform that simplifies the process of buying and selling used cars. Customers can browse through a wide selection of vehicles on Carvana’s website, complete the purchase online, and have the car delivered to their doorstep or pick it up from one of Carvana’s automated car vending machines.

Carvana is an excellent illustration of how crisis can lead to opportunity in the stock market. As US equities cratered in 2022, CVNA was in severe financial trouble and lost more than $8 per share in EPS. However, after cutting costs and raising new capital, the stock swung to a profit in 2023, against all odds.

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Image Source: Zacks Investment Research

Though Carvana has corrected off its 52-week highs achieved in July, the stock is one of Wall Street’s top performers year-to-date, amassing eye-popping gains of 750%. Despite the massive gains, CVNA bears remain stubborn. The stock has an enormous short-interest of 38%. As the year closes, these stubborn bears may finally capitulate for tax harvesting purposes and squeeze shares higher.

Snowflake ((SNOW - Free Report) ): Betting on a Software Comeback

Snowflake is a cloud-based data warehousing platform that provides a scalable and flexible solution for storing and analyzing large volumes of data. Last quarter, Snowflake grew earnings by 127% on revenue growth of 32%, year-over-year. At the same time, the software industry, and SNOW in particular, have seen valuations condense dramatically. SNOW’s price-to-sales ratio is hovering near all-time lows.

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Image Source: Zacks Investment Research

As the year closes, institutions will look to position themselves in stocks with strong growth and reasonable valuations. For these reasons, SNOW is a must-own into year-end.

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