Most of the myths regarding market moves are not worth the paper they're printed on. That said, one old wives' tale worth noting, and even following, is the January effect.
For whatever reason, small-cap stocks do indeed outperform their larger brethren during the month of January.
I recently provided a list of 5 Stocks for the January Effect. On the list was a former high-flyer that lost enough market value to now qualify as a small-cap stock -- NutriSystem (NASDAQ: NTRI).
NutriSystem captured the investor imagination with its unique solution to weight loss and weight management. The company's home delivery of prepackaged meals promised ease of use with results.
Given the huge audience for such a solution, NTRI presented investors with a great growth opportunity. Even though it took a few years to catch on, investors eventually got the idea.
NutriSystem became a darling of the momentum crowd in 2005. In the span of a year and a half, the stock moved from the single digits to above $80 per share. Coinciding with a big marketing program, revenue and investors seemed to grow in tandem.
That's all well and good, but at some point valuation does matter. That time usually comes when growth or results fail to meet elevated expectations. For NTRI, that started to happen in mid-2007.
In no time flat the stock lost more than half its value as the momentum crowd fled. The stock has been trading on a flat line around $15 per share for most of 2008.
In preparing my list of stocks to recommend for the January effect, I wanted to find low-priced stocks of companies with strong growth prospects. NutriSystem fit that bill.
Even though results were disappointing to those owning the stock at $80 per share, there is still meat on the bone for this story. Though competition in the space has increased, NTRI is the leader and the company has great brand recognition.
As a small-cap stock, I thought NTRI would likely rally due to the January effect. I also thought the stock would rally as consumers with weight loss resolutions flocked to NTRI to help their cause.
All that was needed was a spark.
Yesterday, we got just that when the company announced that it would begin selling its products at discount retailer, Costco (NASDAQ: COST). The venture is a brilliant move by the company and should boost sales.
Although there may be some cannibalism of sales from the online and phone channel, the impact will be limited due to COST having a member-only model. NTRI can expect to see an increase in sales without having to worry about selling higher priced product elsewhere.
Investors cheered the news by sending shares of NTRI up nearly 10% yesterday. Not bad on a day when most stocks traded lower. It's a nice start, but I think there's more to come for this January effect special.
Jamie Dlugosch is a contributor to InvestorPlace.com.
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