The 3 Best-Performing Stocks in January

By Rich Duprey Markets Fool.com

While there are times the so-called January Effect can account for why certain stocks will run higher during the first month of the year -- big investment firms are buying up stock after having sold them off in December for tax-loss harvesting purposes -- some stocks jump in January because the outlook for the business looks suddenly brighter.

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Image source: Getty Images.

I ran a screen to identify the best-performing stocks from the S&P 500 in January. The top three performers during the month were Alcoa (NYSE: AA), CSX (NASDAQ: CSX), and NRG Energy (NYSE: NRG). Let's see why they were the big standouts and whether they can keep it going.

Alcoa: Up 30.2%

Shares of Alcoa have been rising ever since it spun off its value-added manufacturing business Arconic last October, not least because its legacy aluminum business was given a boost with a cleaner balance sheet. As the world's largest bauxite miner and refiner of alumina, Alcoa is still going to be subject to the whims of a cyclical industry, but now has the financial fortitude to better weather those storms.

Image source: Getty Images.

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As its recent earnings report showed, demand for aluminum is growing and it looks like it may continue to do so for the year. Despite missing analyst projections by a wide margin with adjusted fourth-quarter profits coming in at $0.14 per share, revenue was up to $2.54 billion, well ahead of Wall Street forecasts of $2.38 billion. Thanks to the strong showing, it was able to offer full-year guidance for adjusted earnings before interest, taxes, depreciation, and amortization of as much as $2.3 billion -- twice as much as it produced last year and also besting analyst projections.

Even better, its industry cycle seems to be on the upswing, suggesting that as good as things were for Alcoa, the future is going to be even better.

CSX: Up 32.2%

Railroad operator CSX may not have risen as sharply as Alcoa over the past few months, but it has also been steadily rising. It got a big boost this month when the CEO of Canadian Pacific Railway (NYSE: CP) Hunter Harrison resigned his position and was said to be teaming up with activist investor Paul Hilal to take on CSX, causing the railroad's stock to surge 23% on the news.

Image source: CSX.

With a reputation for turning around the fortunes of railroads, if Harrison is turning his attention to CSX, it could be the start of something big. After all, Canadian Pacific was the reputed worst railroad in the industry when Harrison came out of retirement to lead it, and today it is arguably one of the best.

CSX might not be in such dire straits as that, but it could stand to see improvement. The railroad is already looking to a better 2017, with higher volumes expected in markets such as agriculture, automotive, fertilizers, and minerals, but that means the vast bulk of its business is forecast to be neutral to negative. A railroad man like Harrison just might be what's needed to tip the balance in the other direction.

NRG Energy: Up 32.9%

The big winner for the month of January is utility operator NRG Energy, which has also become the target of activist investors. Hedge fund operator Elliott Management and private equity firm Bluescape Energy Partners disclosed in SEC filings they had joined forces buy a combined 9.4% stake in NRG to "coordinate and cooperate" on targeting the utility to increase shareholder value.

Image source: NRG Energy.

According to the filing, they believe NRG's stock is "deeply undervalued and that there exist numerous opportunities to significantly increase shareholder value, including operational and financial improvements as well as strategic initiatives." They say they may also nominate one or more candidates for NRG's board of directors at its annual shareholder meeting this year.

The utility gave the standard canned response: It "welcomes input from all shareholders," and is looking forward to chatting with the investors, but analysts suggest what the investors really want to do is take NRG private or merge with another utility.

Others speculate the proposed "strategic initiatives" could include streamlining its operations, such as selling more of its assets to NRG's yieldco, NRG Yield, which already holds the utility's energy infrastructure projects.

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Rich Duprey has no position in any stocks mentioned. The Motley Fool owns shares of NRG Energy. The Motley Fool recommends CSX. The Motley Fool has a disclosure policy.