3 Stocks Ready to Bounce in 2013

12/17/2012 11:15 am EST


George Putnam

Editor, The Turnaround Letter

Sometimes opportunities present themselves and even long-term investors can play a trend that may be complimentary to their long-term strategy as is the case with the stocks below observes George Putnam of The Turnaround Letter.
Most of the time, we advise 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 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. 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 bounce candidates below represent the worst performers in the S&P 500 over the first 11 months of 2012.

Best Buy (BBY)
The technology retailer begins this Christmas shopping season under a cloud, as investors fear that the old brick-and-mortar model cannot survive competition from the Internet. To revive its fortunes, Best Buy brought in a new CEO with turnaround credentials this past August.

Buyout rumors have added to the stock's volatility. If the company can post decent holiday numbers, the stock could really pop in January. If a buyout came to pass, that would boost the stock even further.

Cliffs Natural Resources (CLF)
This supplier of iron ore pellets used in steel manufacturing accounts for just over one-third of US and Canadian pellet capacity. Here again, demand from China will have a major effect on longer-term results. Recent downgrades from some brokerage firms are likely to increase the year-end pressure on the stock.

Hewlett-Packard (HPQ)
This major tech is in the process of reinventing itself, but the bad news keeps on coming. Recently, the company announced an $8.8 billion write-off related to the 2011 acquisition of UK-based Autonomy. We suspect the selling that took the stock down to within a whisker of a nearly 18-year low will lead to a good bounce in early 2013.

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