Gary Karz, CFA (email)
Host of InvestorHome
Principal, Proficient Investment Management, LLC

Many researchers have found that some anomalies occur largely during the month of January. Marc Reinganum ¹ (considered the founding father of stock market anomalies) found that January accounted for nearly half of the total returns for the smallest cap stocks, but less than that for other small-cap stocks. Bruce Jacobs and Ken Levy ² had previously found that a large percentage of the returns between large and small companies occurred in the month of January. Additionally, half of the January returns occur in the first few days of January. Some researchers refer to this as the "small-firm-in-January" effect. Jacobs and Levy also found that during some periods, the entire dividend effect occurred in January and that the Low P/E, small size, and neglect anomalies all existed independently.

The July 1996 issue of Bloomberg included an article entitled "Keep Your Risk Down, But Stay in the Game" in which it reported that David Dreman in a talk to the New York Society of Security Analysts presented evidence that " earnings surprises are the great corrector." Dreman studied stocks that posted positive earnings surprises from 1973 to 1993. The stocks were then grouped into quintiles by P/E ratio and the returns were compared to the market. He found that the lowest P/E group significantly outperformed the market for both the quarter and the year following the surprise. He also examined stocks with negative surprises and found that the low P/E group also outperformed the market in spite of the negative surprise. This is further support of the low P/E anomaly. In his Forbes column on March 27, 1995 titled "Where bad news is good," Dreman concluded "The bottom line is that all news--good or bad-- is positive for low P/E stocks and negative for high." In this case Dreman studied earnings surprises 10% above and below consensus and divided the stocks into top 20% and bottom 20% based on P/E. Low P/E stocks performed better for the month and year following the announcement for both positive and negative surprises.

1. Marc R. Reinganum, "The Size Effect: Evidence and Potential Explanations," Investing in Small-Cap and Microcap Securities, Association for Investment Management and Research, 1997.

2.Bruce I. Jacobs and Kenneth N. Levy, CFA, "Disentangling Equity Market Returns," Equity Markets and Valuation Methods, The Institute of Chartered Financial Analysts, 1987.