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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

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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Puerto Rico Government Bankruptcy: Uncertainty But Also Investing Opportunity

Because of special tax law provisions that exempt the territory’s debt from not only federal taxes but also state taxes in every state, the bonds are widely held by investors across the country. Since the legal action is under a new law that has never been tested, there is tremendous uncertainty about how much creditors will recover and how long the process will take, but there may be opportunities for stock investors to profit from the island’s restructuring as well--perhaps with less downside risk than in many of the bonds. We found four public companies based in Puerto Rico that could benefit from stabilization in the island’s finances as well as three major insurance companies with exposure to Puerto Rican debt. 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:

Value Investing Stock Profit

* Bristow remains in our active portfolio (currently as a Hold), and 2,320% gain is as of 4/11/17.

Five Struggling Stocks That Will Turn Around

 

stock market advicex

 

Kiplinger points out that despite the post-election stock market surge, not all stocks have benefited from the uptick: "More than 100 issues in the S&P 500 have fallen in price this year, including dozens that have slumped by more than 10%....Yet these stocks won’t all stay in the dumps forever. Some will mount a comeback in 2017, making it an opportune time to try to identify the best candidates."

 

Quoting George Putnam, Kiplinger details five value opportunities for the new year.

 

Learn more about Putnam's investing success with turnaround stocks.