Tax-loss selling is a source of artificial selling pressure. Taxable investors have a strong incentive to sell their losers to offset gains, thereby reducing their tax bill, explains Bruce Kaser, editor of Cabot Turnaround Letter.
In a year when many investors aggressively sold stocks during the market downturn to preserve profits, and sold later in the year to capture profits from the rebound, taxable gains could be unusually large.
Window-dressing by professional investors can also create selling pressure. Managers want to be seen as holding “winners” when they show clients and consultants their year-end portfolios. Few want to explain why they continue to own “losers,” so these stocks are sold as December 31 approaches.
Also, managers typically receive the bulk of their compensation through performance-based annual bonuses — so they sell weak/risky stocks to preserve their relative performance, only to become more risk-seeking when the calendar turns.
Once the selling pressure fades around year end, many of the worst performing stocks bounce upwards, sometimes sharply. Nimble investors can capture some of the bounce before longer-term fundamentals return as primary drivers in late January or so. Below are seven stocks that look most promising for a bounce.
Carnival Cruise Lines (CCL)
Like its peers, Carnival suffered from deep losses when most of its revenues evaporated (down 99% in the third quarter) during the pandemic.
Carnival’s shares have shown the weakest bounce (almost none) compared to the company’s two peers — Royal Caribbean Cruises (RCL) and Norwegian Cruise Line Holdings (NCLH) — due to its massive fleet size, relatively underinvested fleet quality and customer base that skews toward older passengers, as well as its tighter liquidity position and high $18 million daily cash burn.
While the mid-term outlook for high-risk Carnival Cruise is somewhat daunting, the shares are so heavily beaten down that any relenting of dire investor pessimism, favorable changes to its strategic or operating direction or more encouraging news about a vaccine could provide a crisp New Year’s jump.
Citigroup (C)
Like most banks, Citigroup has had a rough 2020, with the pandemic pressuring its shares due to higher loan charge-offs and narrower interest-rate-driven profits. Trading at about 70% of tangible book value and 6.4x expected post-recovery earnings, Citigroup’s stock is discounting too dour of a future.
The bank has a valuable commercial banking franchise and strong international operations that may help it recover sooner than domestic peers. Critically, Citi’s strong capital base and hefty reserves should amply support it through a credit downturn.
Helmerich & Payne (HP)
HP is a drilling service company, although it specializes almost exclusively in renting out land-based drilling rigs. Its conservative management has long been a pioneer in steadily upgrading its rig fleet, boosting its appeal as drilling costs matter now more than ever.
The industry depression has hit the company hard, but HP is experiencing only modest cash outflows and has nearly $580 million in cash, which exceeds its debt.
The company continues to pay its $0.25 quarterly dividend, which generates a 4.8% yield (we anticipate the dividend will be suspended if conditions haven’t improved by early next year). Helmerich looks fully capable of surviving the industry depression.
Intel Corporation (INTC)
This iconic chip maker has lost its way recently, unable to match Taiwan Semiconductor in chip production and Advanced Micro Devices in chip design.
Revenues and profits may not grow for years, particularly with Apple’s defection. Nervous growth investors have departed the stock, driving the shares down 33% year-to-date to three-year lows. Valuation is a discounted 9.3x this year’s earnings.
Financially, the company is sturdy and produces immense profits and cash flow while its debt is only 1x its EBITDA, not including $18 billion in cash. New leadership has acknowledged Intel’s issues, which is the first step toward fixing them.
Marcus Corporation (MCS)
Milwaukee-based Marcus is the nation’s fourth-largest movie theater company. It also majority-owns eight high-quality hotels and operates 10 others. Revenues have dropped sharply this year, and MCS shares now trade near their year-to-date lows.
Led by the founding Marcus family, who own 25% of the shares, the company has aggressively cut costs and pared its cash outflow. Its somewhat elevated debt is manageable while its liquidity is strong. Marcus owns 62% of its theater properties compared to only 9% for its peers, providing considerable relief from onerous lease payments.
Once a vaccine is widely distributed, audiences should be drawn in by highly-anticipated movies including Top Gun Maverick, Mission: Impossible 7 and Black Widow. Marcus’ hotels and golf resorts already are seeing some customers return.
NOW, Inc. (DNOW)
This company is a major global distributor of supplies and parts that are consumed in the drilling process as well as in the pipeline, refining and other industries. Caught in the oil and gas drilling depression, its revenues are running about 45% below year-ago levels.
However, impressive cost-cutting has trimmed its third-quarter cash operating profits to only a modest loss, while free cash flow was a positive $57 million.
The company has $325 million in cash and zero debt (net cash/share is about $3), providing robust financial strength and support for its ~$5.60 stock price. The company’s CEO was recently promoted from CFO, suggesting that cost discipline will remain a top priority.
Simon Property Group (SPG)
As the nation’s largest real estate investment trust that concentrates on shopping malls, Simon Property Group has seen some dark days this year.
Yet this higher-risk story has some highly-valuable traits: its malls are filled with enduring brands like Apple; its balance sheet carries over $1 billion in cash with another $8 billion in available borrowing capacity; it’s producing sizeable cash flow and is led by the savvy David Simon.
Adding both potential and risk, Simon is buying high-quality peer Taubman Centers and funding bankrupt retailers like JC Penney and Brooks Brothers. If investors turn to higher-risk stories, this company’s depressed shares look well-positioned to recover.
