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Most of the time, The Turnaround Letter 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 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 identified back in December 2010.

Given the good performance of our year-end bounce stocks for the last two years, this year we followed the same stock-picking formula. The bounce candidates detailed in the chart below represent the worst performers in the S&P 500 over the first 11 months of 2012. Reference the chart below for significant pricing details on all stock recommendations.

Advanced Micro Devices (AMD) is the second-largest maker of chips used in personal computers behind Intel. When the market for PCs is strong, AMD thrives, and when PC sales are weak - as they are now - AMD struggles. The company has a fair amount of financial leverage, which magnifies the stock price moves in both directions. While AMD's long-term prospects are unclear, the stock has good potential for a short-term bounce.

Allegheny Technologies (ATI) is one of the largest and most diversified specialty metals producers in the world. As might be expected, the company's operating performance is heavily dependent on broad economic growth, particularly in China. We wouldn't dream of trying to make an economic forecast, but that doesn't dampen our enthusiasm for Allegheny as a year-end bounce candidate.

Apollo Group (APOL) was one of several for-profit universities that rode a wave of demand for its largely online educational services. But as politicians began to look into the industry's practices and competition from state schools began to rise, the operating models of many for-profit schools have not held up. Apollo is adapting to the new environment, and we suspect there is another chapter to be written for the company.

Best Buy (BBI) begins this Christmas shopping season under a cloud as investors fear that the old bricks-and-mortar retailer 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) is a supplier of iron ore pellets used in steel manufacturing. The company accounts for just over one third of U.S. 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) is in the process of reinventing itself, but the bad news keeps on coming. Most recently the company announced an $8.8 billion write-off related to the 2011 acquisition of UK-based Autonomy. The Turnaround Letter suspects 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.

J. C. Penney's (JCP) results had been lackluster for some time before the board of directors brought in new CEO Ron Johnson in late 2011. Johnson, who was credited with visionary retailing initiatives at Apple, has made major changes at Penney. He has radically revised store layouts, products and pricing. So far, the changes have driven away more customers than they have attracted, and this has driven away many investors as well. If there are signs of bottoming over the holiday season, that could enhance the calendar-based rebound potential.

Newfield Exploration (NFX) is an independent energy exploration/development company. A couple of years ago management decided to move out of the Gulf of Mexico and diversify away from natural-gas production. It has sold a number of non-core assets. The stock looked as though it was leveling off in late summer after a year-long slide, but then management gave a gloomy short-term outlook, which drove the shares down an additional 17% in one day. If natural gas prices continue their recent rebound, that would accelerate a possible jump.

Pitney Bowes (PBI) , best known for its mail handling equipment, is struggling to find a niche in the digital age. Moreover, recent strategic acquisitions have leveraged the balance sheet. But decent cash flow suggests that the company isn't going away any time soon. The stock has been quite heavily shorted; a calendar-based bounce might force some short sellers to cover their positions, thereby pushing the stock up further.

R.R. Donnelly (RRD) is the nation's largest printer of a wide range of products, including catalogs, inserts, magazines, books and financial documents. Clearly, traditional printing is not a growth sector in this increasingly digital world. Donnelly is making acquisitions to better align its product offerings with customer demand, and strong cash flow is buying management time to transition operations. At any rate, the company will certainly be around long enough to have the potential for a good year-end rebound in its stock.

Will Calendar Provide Profitable Bounce?

Company

Symbol

Recent
Price

52-Week Range

Market Cap. Mil.

Price to Sales

Debt to
Equity

Advanced Micro Devices

AMD

2.04

8.35 -

1.81

1,450

0.23

1.92

Allegheny Technologies

ATI

26.32

53.00 -

25.35

2,820

0.54

0.54

Apollo Group

APOL

19.58

58.29 -

18.36

2,200

0.51

0.78

Best Buy

BBY

12.95

28.53 -

11.41

4,370

0.09

0.49

Cliffs Natural Resources

CLF

28.89

78.85 -

28.33

4,120

0.68

0.54

Hewlett-Packard*

HPQ

12.89

30.00 -

11.35

25,320

0.21

1.25

J. C. Penney

JCP

18.14

43.18 -

15.69

3,980

0.28

0.85

Newfield Exploration

NFX

24.15

47.40 -

23.56

3,210

1.22

0.76

Pitney Bowes

PBI

11.09

19.65 -

10.79

2,230

0.45

8.74

R. R. Donnelly

RRD

9.39

15.22 -

8.72

1,690

0.17

3.29

*Previous Turnaround Letter Recommendation

Source: Year-End Bounce Candidates: Losers Become Winners (At Least For A While)