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It’s bargain hunting season again. Holiday shoppers flock to the malls and their favorite websites, and savvy investors search the stock market for year-end discounts. While our approach at The Turnaround Letter is heavily focused on long-term business fundamentals and underlying valuations, even we can be tempted by unusual short-term opportunities at year-end created by artificial selling pressure as investors toss their losers.
One source of selling pressure is the tax code. By selling losers, investors can generate taxable losses to offset other gains, saving on tax payments. Another source of selling is driven by professional investors. These holders of large stakes in public companies don’t want to spend January explaining to clients and consultants why they owned some big losers. It’s much easier to do some “portfolio window dressing” – removing them from their published annual reports by selling them prior to year-end. This tends to push down further the prices of already weak stocks.
Once the calendar turns to January 1st, these artificial pressures end. Many of the prior year’s worst performers bounce upward, sometimes sharply, early in the new year. Eventually, the longer-term fundamentals and valuations take over, but nimble investors can capture some of the bounce.
These ideas can be found by looking through the list of stocks in the S&P 500, and for more in-the-weeds investors the Russell mid-cap and small-cap indices. Not every weak performer will bounce – you want to stay away from stocks that might be weak for very good reasons. With some good analysis you can find some potentially good short-term bounce opportunities. Subscribers can reference the 12 vetted year-end bounce stock picks in our lates issue.