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Top 3 Stocks To Play The Santa Claus Rally

Top 3 Stocks To Play The Santa Claus Rally

The month of December has historically been the most prosperous month for stocks and investors due to a phenomenon that Wall Street has aptly dubbed the "Santa Claus rally". The term was first coined in the 1970s by stock market analyst Yale Hirsch to refer to the stock market rally stock during the last week of December and first two trading days in January.Santa might not be real, but the Santa rally is a well-documented phenomenon characterized by the stock market rallying during the final five days of the year after Christmas and carrying on for the first two days of the new year.

However, the Santa Rally has been adopted to describe stock market gains in the weeks from Black Friday until the end of the year.

The Stock Trader's Almanac says the "Santa rally" has materialized in more than two thirds of Decembers between 1960 and 2020, with the S&P 500 recording an average gain of 1.3% over that seven-day trading period. US stocks have actually posted a positive return in 77.9% of Decembers since 1926. Hit rates have been highest for consumer discretionary and financials at an impressive 80%, closely followed by materials at approximately 75%.

That comes as a breath of fresh air after U.S. markets closed Friday with yet another weekly loss as inflation worries, a weaker-than-expected jobs report, fears of a Federal Reserve tapering sooner than expected and the arrival of the omicron variant in the U.S. spooked  investors. 

If the Fed’s early Christmas gift is not forthcoming, the situation could get a bit dicey. Failure for the Santa rally to show up frequently precedes bear markets. Fortunately, the U.S. stock market has kicked trading in the new week on a strong note after the S&P 500 gained 70 points. Good for a 1.5% climb.

Here are 3 high momentum picks for December as per recommendations by UBS analysts.

#1. BP Plc

BP p.l.c. (NYSE:BP) is a United Kingdom integrated oil and gas company. BP produces and refines oil and gas; invests in upstream, downstream, and alternative energy companies, as well as in advanced mobility, bio and low carbon products, carbon management, digital transformation, and power and storage areas. 

A few days ago, Deutsche Bank's energy analyst James Hubbard raised 2022e Brent oil price assumption from ~$64 to $75 and raising BP to buy from hold. Following the BP upgrade, Hubbard now rates every name in his coverage as a buy, with exceptions Equinor (NYSE:EQNR) and Lundin (OTCPK:LNDNF), which happen to be the best performing names under coverage this year. 

With the sector trading at 7.5x earnings, 14% free cash flow yield and 5% dividend yield on Deutsche's $75 oil price forecast, Hubbard's buy everything approach may work, assuming oil prices cooperate.

BP stock is up 31.1% in the year-to-date.

#2. Glencore

Headquartered in Baar, Switzerland, Glencore plc (OTCPK:GLCNF, OTCPK:GLNCY) produces, refines, processes, stores, transports, and markets metals and minerals, and energy products in the Americas, Europe, Asia, Africa, and Oceania. Gencore produces and markets copper, cobalt, nickel, zinc, lead, chrome ore, ferrochrome, vanadium, alumina, aluminum, tin, and iron ore. The company also engages in the oil exploration/production, distribution, storage, and bunkering activities; and offers coal, crude oil and oil products, refined products, and natural gas. 

Glencore recently delivered its annual investor update today, with the stock promptly selling off, even as the sector rallied on higher metals prices and a strong equity market. A major weak spot in the report was production guidance that it provided with the medium-term zinc outlook, where volume estimates were lowered when compared to last year's update and 2024+ volumes shown falling nearly 20% on mine closures.

Sustaining capex stepped up by $500M per year on inflationary pressures from fuel, freight and currency, cutting free cash flow at spot commodity prices by ~5%. However, even with higher sustaining capex, Glencore indicates the company can generate $10.8B in free cash flow annually, at spot commodity prices (~23% of the current market cap).

Despite calls to divest its coal business, Glencore increased medium-term coal production guidance but affirmed the company's strategy of winding down the coal assets slowly. 

Glencore stock is up 48.3% YTD.

#3. Tullow Oil

Tullow Oil plc (OTCPK:TUWOY) engages in the oil and gas exploration, development, and production activities primarily in Africa and South America. As of December 31, 2020, its portfolio comprised 53 licenses in 11 countries with 28 producing wells. The company was founded in 1985 and is headquartered in London, the United Kingdom.

Tullow shares have been rallying  after the company announced that it will set aside its typical focus on exploring for new discoveries to say it will commit 90% of its investments in coming years on its producing offshore oilfields in West Africa and curb exploration to reduce its $2.4B debt burden. Tullow says it expects to invest ~$2.7B over the next 10 years and make $4B in cash flow to pay down debt and distribute shareholder returns at oil prices of $45/bbl in 2021 and $55/bbl from 2022.

"The scale of cash generation... assuming it is achievable, would go a long way towards addressing the market's funding concerns," BMO analyst David Round says.

The company, which previously said it aimed to raise $1B from asset sales, now says it sees less need for more divestments after selling its stake in yet-to-be developed Ugandan fields to Total for $575M and following cost cuts.

Tullow shares have climbed 44.7% in the year-to-date.

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