Tax Selling Bounce Bets

11/27/2015 10:01 am EST

Focus: GLOBAL

Jim Powell

Principal Analyst, Global Changes & Opportunities

Yearend tax selling can create opportunities for long-term investors to buy quality stocks at discount prices, suggests Jim Powell, editor of Global Changes & Opportunities Report. Here, he looks at some favorite bounce bets. He also offers a blue chip play in consumer products and a "lottery-style" speculation on Greece.

Steve Halpern: Joining us today is global investing expert Jim Powell, editor of Global Changes and Opportunities report. How are you doing today, Jim?

Jim Powell: Fine Steve and how are you?

Steve Halpern: Very good. In your latest issue you focus on select opportunities in blue chip stocks that could arise as a result of tax loss selling as we near yearend. Could you explain the general concept of tax loss selling and the potential balances that might follow that action?

Jim Powell: Yes. Towards the end of every year, Steve, investors start worrying about the taxman and his bite. It's just three months away and they start looking for ways to reduce it. One technique that the IRS allows is to sell stocks in which you have losses and apply those losses towards capital gains that you have in other stocks.

Towards the end of every year you frequently see some very good stocks actually that have short-term losses push down even more. That can create an opportunity for many investors.

It's especially true for stocks that have excellent long-term potential which many tax loss sellers really didn't want to sell at all. In those cases we see that the stocks are usually purchased back after the first of the year after the 30-day rule has been satisfied. We see prices go back up again.

Steve Halpern: Now based on this scenario, you suggest that no industry has a potentially better record for rewarding tax loss investors than energy. You point to two favorites: TransCanada (TRP) and Kinder Morgan (KMI). Could you walk us through your rationale for recommending those stocks?

Jim Powell: Certainly. Both of them are pipeline companies. They are energy transporters with thousands and thousands of miles of pipeline that carry natural gas and oil products and other petroleum products from sources to destinations where they're consumed. Those companies look particularly good to me because they price their services by the volume of what they move not by the value.

The big drop in energy prices has not had a huge impact on both these pipeline companies. Long-term I think that they're going to do extremely well. They're down this year. I think the tax loss selling could punch them down a little bit lower, but long-term I don't see any way that you can fail to make money with any of the high quality blue chip energy companies. Energy always bounces back.

Steve Halpern: Now, you also suggested the industrial sector has some attractive tax loss bounce candidates as well and you point to Alcoa (AA) and Deere (DE). What's the attraction with those?

Jim Powell: Alcoa is in trouble, of course the demand for aluminum is down due to the slowdown in the global economy. Alcoa is making a big transition from providing just raw aluminum to using the aluminum itself to make high quality and high margin products.

This process is going to go on for the next two or three years and I think will transform the company from a purely commodity company to a manufacturing company.

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Deere is having a hard year because agriculture prices are down, crop prices are down, and that means the sale of their expensive farming equipment is down. With the slowdown in the global economy the same is true with their construction equipment, which is the other part of their organization.

I think that long-term both of them will bounce back. In fact, I think we're going to see a bounce in agricultural prices by the middle of 2016.

Steve Halpern: Now I have a last one. I read your recent review of Proctor & Gamble where you noted that it operates in one of the world's dullest markets, but nevertheless, you still see opportunity for long-term investors. Could you explain that?

Jim Powell: Yes. Proctor & Gamble, as you have suggested, is a company that puts people to sleep, but it does have a long history of being cyclical and it also comes back and has been doing that for many, many decades. This year is a special case for Proctor & Gamble (PG). There are a lot of forces within the company that want to break it up into its nine major parts.

Those parts would be worth at least 50% more as independent organizations than they are as part of Proctor & Gamble. I think as more and more talk goes on about breaking the company up either whole or in part that we'll see Proctor & Gamble have a pretty good rebound in 2016. If you can get P&G for another few dollars less, I would be inclined to buy it.

Steve Halpern: Let's now move to the complete opposite end of the risk spectrum. You suggested a very high risk gamble on Greece and you pointed to an ETF called the Global X FTSE Greece 20 (GREK) and you also pointed to a very volatile stock—a penny stock now—National Bank of Greece (NBG), which you suggest could be viewed as a lottery ticket. Can you briefly share your thoughts?

Jim Powell: Yes. Greece has also a long history of cyclical gains and losses. Their economy is something of a roller coaster and we've had nothing but bad news from Greece now for the past three or four years. We may be early birds on this, but I see Greece as a blood in the streets investment opportunity.

The Greece ETF has a good cross section of Greece companies that it follows, it attracts I should say, and I think over the next two or three years it is likely to make a good recovery. The other company that is much, much more speculative but potentially also much more rewarding is the National Bank of Greece. Two years ago it was $6.50. Today it's about $0.25 and it goes up and down by as much as 20% a day.

I think that there's a very good chance that the Greece government and the European Central Bank and the European stability mechanisms that are trying to hold things together over there. We'll take the same position on the big Greek banks as they have as the Fed did over here for our banks and will support them until they can get back on their feet.

It's called a lottery stock because it costs you just a few pennies to buy, but if it pays off it could pay off really big time. I should mention both of these opportunities are available on the New York Stock Exchange and are very easily traded.

Steve Halpern: Again, our guest is Jim Powell with Global Changes & Opportunities Report. Thank you so much for your time today. Also, for people that want more information on these Greek speculations you have something available on your Web site?

Jim Powell: Yes I do. I have a report on Greece that has a lot of the information that we didn't have time for here. If people would just go to powellreport.com/Greece they'll go right to it.

Steve Halpern: Again, thank you for your time.

Jim Powell: Thank you, Steve.

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