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George Putnam, one of the country's leading turnaround and distressed investing professionals, shares his timely insight on the economy and turnaround investing opportunities.

Tax Loss Selling/Year-End Bounce

Year-End Bounce Stock Picks: Contrarian Investing Profit as Others Dump Losers

Excerpted from December 2013 Issue

December 12, 2013
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With the holidays already upon us and the blinding glare of 2014’s headlights staring us down, now is the perfect time to start thinking about prudent year-end investment strategies. As you know, The Turnaround Letter typically advises a long-term approach; however, each year around this time I suggest that investors also consider a shorter-term strategy based on calendar quirks and tax law.

To illustrate this point, I wanted to see how the year-end bounce stocks recommended in our December 2012 Turnaround Letter have performed. As seen below, eight of these ten companies have seen gains of 20% or greater—with Hewlett-Packard rising 104% and Best Buy enjoying a 242% increase (between the time of recommendation and recent stock price [as of 11/11/13]).

Although both J.C. Penney and Cliffs Natural Resources declined in the long-term, these two stocks did see nice short-term gains. It is important to realize that each stock did enjoy a price rise immediately following our recommendation—9% for JCP, and 23% for CLF. This short-term increase followed by an apparent free-fall is not unexpected and should not be discouraging. I further discussed the year-end bounce phenomenon in the December 2013 Turnaround Letter, but the concept can be quickly summarized: Once year-end artificial selling pressure stops, longer-term fundamentals will ultimately determine stock prices—as was the case for both JCP and CLF.

Even factoring in the long-term decline on those two stocks though, the combined companies recommended in December 2012 still enjoyed a 61% average return (between prices at the time of recommendation versus now). That figure is all the more impressive when compared to the more modest gains seen in other indices over this same time period:

The Wall Street Journal and MarketWatch.com recently explored this uniqueand profitable contrarian investing strategy and asked for my input. Mark Hulbert notes, “In preparing a list of stocks that you would want to buy, assuming tax-loss selling depresses their prices, you should exclude stocks whose prospects are ‘hopeless,’ according to Mr. Putnam. One way to do that is to include only those that also are recommended by advisers with good long-term records.” You can read the full “Tax-Loss Selling: A Once-a-Year Investing Opportunity” article here.

Given the market-beating results seen over the last three years, we followed the same formula this year in our recently-published year-end bounce stock picks for 2013. The ten stocks detailed in the December 2013 Turnaround Letter represent the worst performers in the S&P 500 over the first 11 months of 2013, with slight adjustments to assure a well diversified list. Read our year-end bounce stock analysis and investing advice now.

 

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Don't Make Too Much of Price History

It can be tempting to look at a depressed stock and think, “it used to trade at 40 and now it’s at 8 – therefore it must be a bargain.” Unfortunately, the fact that a stock once traded at a higher price does not guarantee that it will ever get back there. One big reason that a stock trades so much lower than before: its earnings potential or assets have deteriorated. Without some fundamental improvement, the share price will continue to lag, or worse. Read More.

Market-Beating Profit: The 200+ Club

Turnaround stocks present a unique opportunity for savvy investors to buy in at bargain prices. Take a look at this list of just a few of our purchase recommendations that have realized a return rate of 200% or better:

* Bristow remains an our active purchase recommendation, currently as a "Hold," and 1,928% stock profit is as of 8/11/16.

Retail Turnaround Trio

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MoneyShow.com interviewed George to learn more about his favorite value stock picks for today's market. In "Retail Turnaround Trio," Steve Halpern highlights three of The Turnaround Letter's recently-profiled retailers: JWN, TIF and SPLS.

 

Putnam notes, "Well the retailing sector is undergoing very fundamental change as people move away from the bricks and mortar mall doors to buying more and more online but that's not going to wipe out all of the old-fashioned retailers. Starting the middle of 2015, investors just moved away from retailers en masse and a number of them are trading at about half the level they were a year ago. We thought some of the higher quality names that definitely will be survivors looked interesting."

 

Learn more about these three retail stocks poised for a turnaround.