Black Friday in Reverse

Today marks the unofficial beginning of the holiday shopping season, as “Black Friday” – the day after Thanksgiving – has become the penultimate act of consumer frenzy. I’m not sure exactly when this tradition started, but it grows stronger every year and has spilled over into the days that precede and follow it.

A similar thing happens in the stock market about this same time of the year, except it has the opposite effect of motivating investors to buy what is on sale. Instead, many professional portfolio managers feel compelled to buy what is most expensive, in the belief that they need to show their investors that their portfolios include the hottest stocks.

This phenomenon is most commonly referred to as “window dressing,” in that adding these high-priced stocks now does little more than improve the appearance of the portfolio, but not its performance. It used to be that window dressing did not occur until the last two weeks of December, but just as the holiday shopping season has crept forward on the calendar so too has the desire by portfolio managers to buy many of these stocks before everyone else does.

The entirely predictable result is that the rich get richer and the poor get poorer, as companies that have performed particularly well benefit from the added demand for their stock while those that have performed poorly suffer as their stocks are thrown overboard at fire sale prices.

Most likely the largest beneficiary of this year’s window dressing will be Apple (AAPL), which now has total market capitalization of about $700 billion, or almost twice what the company was worth when Tim Cook took over as CEO three years ago in the wake of Steve Jobs’ death. The stock has delivered a total return of 61% so far this year, and appears to be heading towards $125 by the end of the year.

Despite the many naysayers that fled Apple stock when Mr. Cook took over, he has indeed delivered the goods, both literally and figuratively. Compounding Apple’s largess this time of the year is the likelihood that many of its products are precisely what a lot of shoppers will be racing through stores to buy this Friday.

Which other tech stocks will most likely be the big winners of this season’s window dressing? Despite all the attention paid to media darlings like Twitter and Facebook, don’t be surprised to see some of the old legacy PC stocks get snapped up too, such as Microsoft (MSFT), up 36% year-to-date; Intel (INTC) up 51% y-t-d; and Cisco (CSCO) up 29% y-t-d appear to be obvious choices.

On the flip side, which tech companies will most likely suffer further declines in their stock price between now and the end of the year? It won’t surprise me at all to see portfolio managers ejecting from Netflix (NFLX) down 2% y-t-d; (AMZN) down 17% y-t-d; and former “must-own” social media stock Twitter (TWTR) which has shed 44% of its value so far this year.

As for the rest of the stock market, it will be interesting to see how a pure momentum stock like electric car manufacturer Tesla (TSLA) does over the next four weeks. It closed at $150 at the end of 2013 and now trades closer to $250 for a gain of 40%. In theory this is the type of holding that every growth fund manager should want to have in his portfolio at the end of this year, but what happens in 2015 when reality sets back in?

In stark contrast to Tesla is fellow automaker General Motors (GM), which ended last year at $40 and is now at $32, a decline of 20%. Again, fund managers may not want to admit to holding this stock on their year-end statements, but a strong value argument can be made that it now offers less risk and more near term upside potential than Tesla. And if fund managers do dump GM in December, will they be climbing over each other trying to buy it back as soon we get into next year?

As you might expect, there is an opposite effect in January when many of these trades are reversed, but we’ll talk more about that in late December as we get closer to the end of the year. In the meantime, hang on to your winners and don’t chase the losers just yet. Timing is everything, especially when you have buyers in the market that can’t wait to buy whatever is most expensive!