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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 Candidates: Losers Become Winners (At Least For A While)

Excerpted from December 2012 Issue

December 11, 2012

Most of the time, our investment newsletter advises taking a long-term view and focusing on stocks where the underlying business fundamentals are turning around. However, around this time of year it is worth considering a shorter-term strategy based more on the quirks of the calendar--and the tax law--than on business fundamentals.

Every year around this time we see certain stocks get pushed down by artificial selling pressure. That pressure is removed after year-end, often causing those stocks to pop up nicely. The artificial selling pressure comes from two sources: tax-loss selling and portfolio window dressing.

Late in the calendar many investors begin thinking about their tax bill. This causes them to sell losing stock positions to realize capital losses that can be used to offset other gains that they may have. Around the same time, many professional portfolio managers begin worrying about their year-end reports to clients. They would rather not have their losing stocks show up in those annual reports, and so they sell the offending positions to get them out of the portfolio before it is memorialized at the end of the year.

The new year brings a clean slate with respect to both tax and reporting issues. When the artificial selling pressure stops, many of the previous year’s dogs jump up and suddenly become investor darlings--at least for a while. Ultimately, longer-term fundamentals will drive the prices of these stocks, but you can often make good money from this year-end bounce pattern.

For example, a year ago the ten year-end bounce candidates that we identified in the December 2011 issue significantly outperformed the S&P 500 through January. The outperformance narrowed, but was still meaningful, through the end of March. But by November the poor fundamental results from several companies on the list had dragged the group’s performance below the S&P’s. This is similar to the strong short-term performance (and weaker long-term performance) that we saw from the year-end bounce candidates that we identified in December 2010.

 Given the good performance of our year-end bounce stocks for the last two years, this year we are following the same stock-picking formula. The turnaround investing bounce candidates detailed in our full December 2012 article represent the worst performers in the S&P 500 over the first 11 months of 2012. Subscribe now (or log in if already a subscriber) to find out which 12 stocks you should consider adding to your portfolio right now for potential year-end bounce stock profit.

 

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George Putnam's Favorite Stocks for 2016

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Watch Headlines for Turnaround Stock Opportunities

Negative media headlines can be a great source of turnaround ideas. Stories about struggling companies, management turmoil, failed strategies, large financial losses, industrial accidents, lawsuits and the like can drive a stock to well-below reasonable levels and may provide a buying opportunity. Like all Wall Street axioms, however, “buy on bad news” must be accompanied by careful analysis to evaluate the potential for turnaround success. Read More.

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Banking on a Financial Sector Turnaround

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MoneyShow.com recently tapped George's favorable opinion for a banking industry rebound. In "Turnaround Expert's Banking Bets," Steve Halpern highlights a trio of Putnam's top stock picks from the battered financial sector.

 

George reminds value investors: "Fortunately, many of the factors...just aren't present in the market, and the other reason that investors seem to be down on the banks is they sort of expected the Fed to raise interest rates a little faster than they have. And the banks do better when interest rates are rising because they have wider margins on their loans, but I think the Fed will gradually raise rates to we will see profits improve, and so I think this downturn is really temporary."

 

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