Stock Quotes in this Article: DENN, SKX, STEC, USNA

Have you noticed how the Christmas buying season has come earlier and earlier over the last few years?

Retailers seem to be in a rush to get an edge against the competition extending the buying season any way possible. The holidays seem to begin well before Thanksgiving now.

And it is not just the Christmas season. Every buying season, from back-to-school to Halloween, comes sooner each passing year. The longer the buying season, the more sales, or so the theory goes.

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Retailers are not the only ones playing this game. Investors looking to get an edge on other investors will now play seasonal trends earlier and earlier too. A classic example of this can be seen with the so-called January effect.

The period of time when small-cap stocks perform better than their larger brethren has been morphing into the December effect over the last several years. In other words, investors are now bidding up the prices of small-cap stocks in December, hoping to catch the gains of January.

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This year, investors were even buying small-cap stocks in late November in order to obtain an advantage. Lost in the worry over Ireland and Korea during last week’s trading session was the fact that the Russell 2000 index of small-cap stocks actually performed quite well.

Evidently, investors looking to get a jump on the January effect are buying small-cap stocks today. You should do the same. Here are four small-cap stocks to consider.

Denny’s (DENN)

Casual dining chain Denny’s made a big splash two years ago during the Super Bowl: Free breakfast for everyone. That spectacular marketing gimmick brought customers in droves. The idea was that those customers would return or at a minimum purchase drinks that would offset the cost of the free breakfast.

Certainly the company got miles of press off the promotion, but I’m not sure that value translated into increasing the market value of the stock. Shares are trading at about the same level as prior to the offer.

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Let’s assume that for the longer haul, the effort was worth it. Today Denny’s trades for 10 times trailing earnings and 9 times forward earnings. If indeed there is a lag in performance, Denny’s may be ready to take off.

Investors can use the January effect be the catalyst for gains in the stock. I would buy shares today hoping to get a two-month pop.

Stec (STEC)

Stec has been gaining steam of late on the possibility of a larger player taking over the flash memory company. With or without a merger, the value of this stock deserves to be higher. It sells products into a large market that is growing, and it has a first-mover advantage over the competition.

With a valuation of 22 times trailing earnings and just 13 times forward earnings, the company is expected to grow its earnings more than 20% in the coming year. Prior to the announcement of competition entering its market, Stec traded for more than $30 per share.

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Today you can buy the stock for just over $17 per share. The competition does not seem to be negatively impacting earnings growth. I expect Stec to get a big January-effect bounce, forcing the valuation to approximate the growth potential of the company.

Usana Health Sciences (USNA)

The nutrition business is exploding, and Usana Health Sciences is well-positioned to take advantage. The company provides vitamin supplements and nutritional bars as well as personal care products. It is a small company that many may not have heard of.

Investors should take notice. The company is growing smartly, yet the stock trades for only 12.75 times forward earnings. Not a bad price for a company growing earnings at a double-digit rate.

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Put a 20 multiple on the expected $3.35 of December 2011 earnings, and you get a stock trading for nearly $70. You can buy the stock today for $42. My guess is that the January effect pushes shares above $50 by the end of January.

Skechers USA (SKX)

With a market valuation of slightly more than $1 billion, Skechers USA is right on the border of being considered a small-cap stock. I’m putting the name on the list for January-effect stocks nonetheless, given that prior to the last month or so of stock gains, the market cap was less than a billion.

Shares of SKX have gained more than 10% in the last month alone. There are more gains to be had. The stock trades for ridiculously low valuation of 7 times trailing earnings and just 9 times forward earnings.

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Most important, its products are gaining in popularity. I know my daughter goes through one or two pair of Skechers each school year. She loves the shoes.

Investors should love the stock. The January effect could push shares closer to $30 per share.

To see these stocks in action, check out the 4 January Effect Stocks portfolio.

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At the time of publication, author had no positions in stocks mentioned.

Jamie Dlugosch is a founder and contributor to MainStreet Investor and MainStreet Accredited Investor. Formerly, he was president and CEO of Al Frank Asset Management. He has contributed editorially to The Rational Investor, The Prudent Speculator, Penny Stock Winners and InvestorPlace Media.