Distressed Investing Blog

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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