No guarantees, but statistics supportive

Source: CMC Markets, 21 November 2018

As the saying goes, “there’s no smoke without fire”, and this certainly applies to the Santa Rally phenomenon. The table below – showcasing yearly performance since 2007 and average performance since 1984 – shows that, over the past 34 years, the UK 100 has rallied 27 times in December. An impressive 79% hit rate. Moreover, a full 30% of these have seen a Santa Rally in excess of +4% (38% more than 3%, 56% more than 2%).

The best UK 100 Santa Rally performance (+8.5%) came in 1987 and, there have been 7 instances of rallies greater than 5% (1987, 1989, 1993, 1997, 1999, 2010 and 2016). Conversely, the worst 4-week performance came in 2002 (-5.5%), easily underperforming other negative years, with the UK 100 losing more than 2% on only one other occasion (2014).

But the phenomenon isn’t limited to the London stock market, with most other major indices enjoying the same seasonal rise, although the UK 100 tops the scoreboard for the number of positive years.

Christmas gifts for UK Index blue-chips

For the UK 100 to rise, individual blue-chip components must, therefore, also be prone to rally in the final 4 weeks of the year. The table below highlights the 20 companies whose share price has increased on most occasions since 1994 (note shorter dataset for shares than indices).

The most striking takeaway is that the rank outperformer, CRH, is the only UK 100 company to have rallied on 21 occasions out of 24 (88% hit rate). The company also sits confidently in the Top 5 for best average Santa Rally performance, with an average gain of more than 6% in December.

Other companies of note include media giant WPP (20 up years), the only one up for the past 12 years, with a similarly strong 6% average gain. Housebuilder Taylor Wimpey (19 up years) may have risen fewer years but has just as impressive an average gain: 6.0%. In fact, property/building makes up half of the top 12, with average up years of 19 and an average gain of 4.8%.

Not every stock will enjoy a Santa Rally every year and there is no guarantee that we will see a UK Index bounce this December, with global equities in a corrective phase since late October. And yet, this isn’t the first bear market seen this year, with many stocks either fallen and bounced back several times. Starting in January, the UK Index fell 950 points (13.8%) over a 2-month period, but then rallied back over 15%, reaching record high levels in May.

It is worth noting, therefore, that some of the best historical performers have had a torrid 2018. WPP cut its profit targets in March and reported a slow start to 2018 while long-term CEO Sorrell was ousted in April. Its shares are -42.5% from 2018 highs, just 3.5% off 2018 lows, -36% year-to-date. Will it be rescued by its 83% positive hit rate? Or will it finish the year with a lump of coal in its stocking?

Another struggler is Taylor Wimpey (-30% from 2018 highs, +1.6% from lows, -27% year-to-date), with Brexit uncertainty weighing heavily on the UK housing market. Will its 79% hit rate help it build a Santa Rally?

Christmas gifts for UK Index blue-chips

For the UK 100 to rise, individual blue-chip components must, therefore, also be prone to rally in the final 4 weeks of the year. The table below highlights the 20 companies whose share price has increased on most occasions since 1994 (note shorter dataset for shares than indices).

The most striking takeaway is that the rank outperformer, CRH, is the only UK 100 company to have rallied on 21 occasions out of 24 (88% hit rate). The company also sits confidently in the Top 5 for best average Santa Rally performance, with an average gain of more than 6% in December.

Other companies of note include media giant WPP (20 up years), the only one up for the past 12 years, with a similarly strong 6% average gain. Housebuilder Taylor Wimpey (19 up years) may have risen fewer years but has just as impressive an average gain: 6.0%. In fact, property/building makes up half of the top 12, with average up years of 19 and an average gain of 4.8%.

Not every stock will enjoy a Santa Rally every year and there is no guarantee that we will see a UK Index bounce this December, with global equities in a corrective phase since late October. And yet, this isn’t the first bear market seen this year, with many stocks either fallen and bounced back several times. Starting in January, the UK Index fell 950 points (13.8%) over a 2-month period, but then rallied back over 15%, reaching record high levels in May.

It is worth noting, therefore, that some of the best historical performers have had a torrid 2018. WPP cut its profit targets in March and reported a slow start to 2018 while long-term CEO Sorrell was ousted in April. Its shares are -42.5% from 2018 highs, just 3.5% off 2018 lows, -36% year-to-date. Will it be rescued by its 83% positive hit rate? Or will it finish the year with a lump of coal in its stocking?

Another struggler is Taylor Wimpey (-30% from 2018 highs, +1.6% from lows, -27% year-to-date), with Brexit uncertainty weighing heavily on the UK housing market. Will its 79% hit rate help it build a Santa Rally?

Lumps of coal, but with a shine

Examining December laggards also offers some interesting nuggets of insight. Surprisingly, less than 10% of current UK 100 members have a negative average December performance since 1994, only one of them being for anything worse than -1%. Strong statistics.

What immediately jumps out from this list is that, despite weak performance, less than half of the list (9 out of 20 names) have been, on average, negative into year-end with bottling company Coca-Cola HBC, a relative newcomer, the big stand-out (average -3.3%), weighed down by a poor 2014 and 2015.

Many of the other laggards have, on average, still traded pretty much flat to +1%. Hardly a disaster. Many even have hit rates that could compete with some of the winners, up 10-16 of the past 24 years. Look at engine manufacturer Rolls-Royce (+1% average; 62% hit rate) and retailer Next (+0.2% average, 58% hit rate).

A brief sector analysis shows Banks and Pharmaceuticals tending to be weak (though still technically positive) performers in December, while Construction and Mining have a history of outperformance.

Benefiting from the downturn

The Santa Rally phenomenon is just that. It’s based on historical data. No guarantees, but statistically significant and commonly accepted. To harness these statistics and transform them into better quality and tradable opportunities, investors might also want to consider current year-to date performance. Why?

As much as the theory has it that a Santa Rally can be fuelled by more buying of stocks that have done well (the “window dressing” we mentioned earlier), some of the most attractive tradable opportunities could also lie among those stocks which have a strong record of year-end gains but have performed poorly this year. Catch up trades, if you like. Below are the 12 worst UK 100 and performers of 2018 so far.

As in previous years, a number of these stocks hail from similar sectors. Health care equipment manufacturers Spire Healthcare and Mediclinic suffered after profits warnings. Regulation and tax changes in Gambling have hurt Playtech and William Hill. IT stocks have also been hurt, with both Micro Focus, Sophos and Sage Group warning of weaker outlooks and lower profits.

Advertising agency WPP also cut its profits targets in March and reported a slow start to 2018. Vodafone is struggling to overcome investor doubts about its re-growth strategy and big debt pile, especially after its long-term CEO left in the Spring.

British American Tobacco is struggling to adapt to a changing financial environment. Tobacco manufacturers benefited from low bond yields, investors rushing to tobacco as proxies for stable income. As bond yields began to rise again, the rotation back to bonds has understandably seen Tobacco shares stubbed out.

We thus have several big household names which have underperformed so far this year, easily recognisable to both financial investors and the man-on-the-street alike. And many of them tend to do well in December.

Overleaf, we have identified a handful of attractive trading opportunities for December. Not just because their share price is depressed, but because the statistics would imply that they have a better than average chance of delivering a bounce back into the year-end.

On the following pages, we delve into our 12 favourite stock picks for this year’s Santa Rally, highlighting charts, broker projections and technical analysis for each. Will we see a rally in these stocks come Christmas?