Seasonality in Individual Stocks – Is it Based on Sound Evidence?
People often wonder whether it is actually possible to make profitable trades by taking advantage of seasonal trends in individual stocks. Most investors accept the idea that seasonal trends in commodities exist and are also quite open-minded with respect to recurring phenomena such as the year-end rally in stock indexes.
However, the assertion that individual stocks exhibit seasonal patterns of their own is often greeted with skepticism. People frequently ask if these are not just a coincidence.
I am nevertheless convinced that individual stocks do in fact exhibit seasonal trends. Below isan example that demonstrates why I do not believe them to be random occurrences, but rather trends that are supported by sound evidence.
Agrium Shows that Seasonal Patterns in Individual Stocks are not Random Phenomena
The chart below shows the quarterly results of Agrium Inc (NYSE:AGU), a Canadian fertilizer and agricultural services company. The company's second-quarter earnings are highlighted in red.
Agrium, quarterly earnings, 2011 – 2016
Q2 earnings are on average far higher than earnings in the rest of the year. Data source: Agrium, chart by author
As the chart illustrates, Agrium regularly posts significantly higher earnings in the second quarter than in the remaining quarters of the year; there are no exceptions to this pattern.
In line with its earnings pattern, the stock typically rallied at an annualized pace of 41.41 percent in its strong seasonal period, while it gained just 6.76 percent annualized in the rest of the year.
Evidently, the seasonal pattern in the company's earnings is as a rule not fully priced in by investors. However, Agrium is not the only company that displays seasonal fluctuations in its quarterly earnings; many other companies exhibit them as well.While earnings fluctuations in other industries are in most cases not as large as in the agricultural sector, they definitely exist.
The seasonal patterns in the stock prices of companies in other industries are often even more striking though. Seasonal fluctuations in quarterly earnings that are less pronounced are usually also less widely known, or possibly not even known at all – and in such cases seasonal earnings surprises will tend to exert an even stronger effect on stock prices.
Conclusion
In view of the above investors should definitely consider taking advantage of the profit opportunities offered by seasonal patterns in individual stocks.