At this time of the year, many investors are selling stocks that have produced losses in their portfolios. This allows them to harvest losses and offset gains in other stocks. This also creates a seasonal opportunity to buy already beaten-down stocks while tax-loss selling pressure is in full-swing. This tax-selling pressure typically fades in the last days of December and that can lead to big gains in what is often called a "Santa Claus Rally". Investopedia.com defines the Santa Claus Rally as:
"A surge in the price of stocks that often occurs in the week between Christmas and New Year's Day. There are numerous explanations for the Santa Claus Rally phenomenon, including tax considerations, happiness around Wall Street, people investing their Christmas bonuses and the fact that the pessimists are usually on vacation this week."
The end of tax-loss selling can take a lot of downward pressure off a stock and that can lead to a significant and rather sudden rebound. With just about three weeks left before the final days of December arrive, it is time to buy stocks that could be poised for big gains. With that in mind, here are a couple of stocks that appear cheap and which have also been beaten-down from tax-loss selling, making these picks ideal candidates for the coming "Santa Claus Rally":
American Superconductor Corporation (NASDAQ:AMSC) shares are trading for nearly half the 52-week high and just for a fraction of the all time high. This company was doing very well a few years ago and some analysts even believed it could be an attractive takeover target from the likes of General Electric (NYSE:GE) which has a wind turbine division and remains one of the world's largest turbine suppliers. In 2010, this stock even traded for over $40 per share. However, the share price has been beaten down to what appears to be bargain levels and there are a few factors that could cause this stock to rebound significantly.
American Superconductor operates two main lines of business: "Windtec Solutions" offers wind turbine electronic controls and systems, as well as design and engineering services that reduce the cost of wind energy. The "Gridtec Solutions" provides engineering services and advanced grid systems that maximize network reliability, efficiency and performance.
One of American Superconductor's largest customers has allegedly stolen the technology it once bought from this company. That customer is based in China and there is now a high-profile case pending which could cause a major surge in this stock. The U.S. Justice Department is also involved and based on a number of factors, it seems like American Superconductor has an extremely strong case against the Chinese firm which is called "Sinovel". It also appears that this case is being viewed as a potential hallmark in terms of politics and as a litmus test on whether China's leaders are serious about cracking down on intellectual property theft. According to one article, American Superconductor is seeking $1.2 billion in its claim and those numbers seem well supported by the facts. Even if it receives a fraction of that amount, this stock could double or triple in value very quickly. At around $1.51 per share, American Superconductor has a market capitalization of about $100 million. It also has a solid balance sheet with about $26 million in cash and just around $13.7 million in debt.
The company recently announced a $10 million of incremental borrowing capacity based on the outstanding balance its existing term loan. It also announced an "At Market Issuance" or "ATM" agreement with MLV & Co. LLC., which could allow it to sell (from time to time, if needed), up to $30 million worth of stock. The market does not typically react positively to announcements where a company is announcing a secondary offering and this stock has dropped from about $2.20 to just $1.50 per share since this was announced. However, this appears to be an overreaction because it is not a traditional secondary offering and it might not even happen (especially not at these low prices). The company already expanded its borrowing capacity and it does not have a substantial debt load, so putting this agreement in place may have been more of an "insurance policy" in case the lawsuit is not settled relatively soon. It might also have been put in place to send a potential sign to the defendant that American Superconductor has the financial resources in place to continue and this puts it in a much better position. While this borrowing capacity expansion and "at market issuance" deal has had a negative short-term effect on the stock, it clearly puts the company in a better negotiating position in terms of any settlement. With this potentially being the case, it seems that the recent pullback appears to be a buying opportunity, especially since some investors had a knee-jerk, hit the sell button reaction which makes an already undervalued stock, even cheaper.
When considering probabilities, it seems that the most likely scenario is for this case to be settled by Sinovel. It appears to have the means to offer a major settlement to American Superconductor and it also could be in its best interest to do so in order to alleviate the heavy political and other pressure from U.S. Government officials and entities. It also seems that it would be a smart business decision since Sinovel could have troubles in securing orders from the U.S. as it has done in the past for major wind turbine projects. One website describes Sinovel as: "...the largest turbine manufacturer in China and by 2011 market share, the second largest in the world. The company aims to be the largest turbine maker by 2015 with half of sales for foreign markets." This appears to put it in direct competition with General Electric's wind turbine division, which is another reason why American Superconductor could still be an attractive takeover target for its technology and patents.
A settlement with American Superconductor would likely help to smooth out relations with U.S. officials and make Sinovel better positioned to increase sales in foreign markets. Even if the settlement was for just $250 to $300 million, (instead of the $1.2 billion in claims), shares of American Superconductor could more than triple in value on this type of announcement. That is because there are only about 63 million shares outstanding. This means that a $250 million settlement would be equivalent to about $4 per share in cash for American Superconductor or nearly triple the current share price. As American Superconductor has a current market capitalization of $100 million and holds rights to about $1.2 billion in claims, the market value appears to be way too cheap. In fact, it is so undervalued that American Superconductor could even be a takeover target from a private equity firm who could find major upside value if the company wins the lawsuit or if the case is settled. With the effects of the recent pullback and tax-loss selling pressure, it appears that the stock and this company is so undervalued that it would even be cheaper for Sinovel to just buy American Superconductor. (While I doubt that would be allowed to happen, this gives a sense of the rock-bottom value of this stock.)
Aside from the major settlement potential this stock appears to have, it also looks like a great candidate for a major rebound into January as tax-loss selling ends. This could contribute to a possible short-squeeze in the coming weeks. According to Shortsqueeze.com, over 5 million shares have been sold short. With an average daily volume of around 440,000 shares, the short interest is equivalent to nearly 12 days worth of trading volume. This significant short interest is just one more reason why I expect this stock to surge into January 2014.
Now that the company has added some additional financial strength and increased its negotiating leverage, the short case seems likely to unravel in the coming weeks. This company has posted losses in recent quarters and that is a risk factor to consider; however, this is partially offset by the solid balance sheet. The remaining hope of the shorts seems to be limited to a scenario whereby the litigation drags on and the company starts to run low on cash. However, that case appears very flawed when you consider that there are many private equity firms and companies that specialize in buying litigation claims. That means it could also potentially consider selling part or all of its $1.2 billion in claims, if a settlement is not reached in the next few quarters. That would limit the upside of this stock, but it shows that even in a worst case scenario, the company can probably easily monetize the claims for perhaps even more than the current $100 million market cap. That means shorts are probably running on fumes of false hopes if they expect this stock to drop significantly more.
It's also very interesting to note that insiders at American Superconductor own about 28% of the company and some executives have been buying even more shares in 2013. For example, Kevin Douglas owns about 5.7 million shares and other top executives and officers also have meaningful positions. This is important because it aligns these insiders with shareholders as they would also benefit tremendously from a potential settlement deal with Sinovel. Management also seems to have positioned the company for growth as analysts see revenues jumping about 30% from around $91 million in fiscal year 2014 to nearly $120 million in fiscal year 2015. This growth is important as it can allow the company to return towards profitability and this reduces downside risks for investors.
With this stock trading at what appears to be rock-bottom levels, and with heavy insider ownership, short-squeeze potential, and a very strong and high-profile case pending which could result in a huge payday for American Superconductor, it seems like a great time to consider buying this stock. It could potentially rebound into January as tax-loss selling ends and also surge on a settlement deal which could come at any time. While risks remain, they appear limited at this cheap valuation especially since the company has the resources to proceed in pursuing its claims. The risk to reward ratio seems to greatly favor the upside, in terms of probabilities. It is very likely that American Superconductor's technology has considerable value and that the roughly $1.2 billion in claims it has also have major value. The patents and technology it has and the value of its claims (let's also not forget about nearly $26 million in cash on the balance sheet), appear to be worth much more than the current $100 million in market cap. Based on this, the most likely outcome could be some type of settlement; the only real question might be how much. Earlier this year, analysts at Ascendiant Capital Markets put a buy rating and set a $3.25 price target on this stock, although if the company receives a larger than expected settlement, the stock could clearly go even higher, especially thanks to the short-squeeze potential it holds. This stock appears to be building a base in the $1.50 range and that could be a sign it has bottomed out and that it might next be poised for a short-term rebound. The next upside catalyst appears to be the end of tax loss selling which is coming up soon and a possible short-covering rally. Beyond that, the largest catalyst would probably be a potential settlement, which could come at any time.
Here are some key points for AMSC:
- Current share price: $1.51
- The 52 week range is $1.42 to $3.34
- Earnings estimates for 2013: a loss of 65 cents per share
- Earnings estimates for 2014: a loss of 44 cents per share
- Annual dividend: none
Barrick Gold (NYSE:ABX) has had a very tough year and this has caused losses for many investors. As gold prices dropped to about $1,250 per ounce, investors became less enamored with the mining stocks and more concerned with debt levels and profit margin erosion. This has caused most gold stocks to plunge from the 52-week highs and many now trade not too far from 52-week lows. Barrick Gold shares appear to have bottomed out several weeks ago. The stock now trades for about $16, which is well below the 52-week high of about $36. With the kind of price action this stock has experienced, it is sure to be one that many investors have losses in and that makes it a candidate for tax-loss selling at this time of year.
Barrick Gold has a multi-billion dollar debt load on the balance sheet and that became a concern for investors especially as gold prices declined. However, the company recently took steps to shore up its balance sheet by announcing a $3 billion secondary stock offering. While this is another factor that has weighed on the stock in recent weeks, and while management should have thought about doing this when the stock was much higher, it does appear to reduce balance sheet risks for investors. The shares in this offering were sold at $18.35 and the stock can now be bought for even less. Aside from greater financial strength, there are other positives to consider. The company is planning to reduce expenses by $500 million on a annual basis by improving procurement and management costs. This could lead to stronger financial results in the future.
In spite of the tough year, Barrick Gold is the world's largest gold company and it is a low cost producer. This stock looks very undervalued and ready to rebound into 2014, for a number of reasons. The Federal Reserve is expected to remain highly "dovish" and that could keep investors looking at hard assets like gold to protect themselves from dollar printing or a potential debt crisis as the U.S. Government reaches record debt levels of about $17 trillion. If you include entitlements and other liabilities that are not included in many U.S. Government forecasts, the total burden could be more like $211 trillion, according to some economists. With numbers like this, it makes sense to have some exposure to gold and to mining stocks, especially now that the sector is trading at lower levels.
Of course, a continued drop in gold is a potential downside risk to consider. However, gold and mining stocks have already seen significant declines and could be one of the most hated asset classes in 2013, and when so many are bearish, it is often time to buy. Some investors think gold will continue to drop because the Federal Reserve may start to taper. That might be flawed thinking because even if tapering does occur, it does not mean that the avalanche of money already printed will go away, and in fact tapering means that these easy money policies might slow down, but not stop. Some investors and countries are getting wise to how diluted paper money has become and how the U.S. Government is increasingly debt-ridden. Tapering won't change those facts and U.S. debt just continues to grow. The fact is, that the dollar has no inherent value if users lose confidence in it. Throughout the ages, gold has always had an inherent value but that can't be said for paper currencies, many of which have come and gone, and many more will go in the future. When you see alternative currencies like Bitcoin growing in popularity, this shows an underlying concern about a loss of trust in the dollar in the future. It looks like China is already losing faith in U.S. debt and the dollar. One recent article suggests that The People's Bank of China or "PBOC" will stop buying U.S. Treasuries. A huge and ever rising source of gold demand is coming from China and this should support higher gold prices. If the PBOC stops buying Treasuries, that could start a substantial amount of new demand for gold purchases that has not yet been factored in by the market or the shorts. An article at Zerohedge.com states:
"....the PBOC was quietly seeking to make the renminbi the new gold-backed reserve currency, the mainland has imported an unprecedented 2,116 gross tons of gold from Hong Kong (in addition to the hundreds of tons produced domestically), for the first time crossing the 2k gross ton import barrier in a two year period!"
Furthermore, a big reason to buy is because Barrick Gold shares are cheap now. Analysts expect the company to earn $2 per share in 2014 and with the stock at about $16 now, that puts the price to earnings ratio at just 9 times earnings. This is a major discount to the market as the S&P 500 Index (NYSEARCA:SPY) now trades for around 16 times earnings. Barrick Gold shares also look undervalued when compared to Newmont Mining (NYSE:NEM) which trades for about $25 and is expected to earn $1.77 per share in 2014. With Barrick Gold poised to earn more in 2014, and with a share price at a much lower level, it is easy to see why Barrick shares have room to move much higher. It also offers a dividend of 20 cents per share, which yields 1.2%. Many stocks rebound after the shares in a secondary offering are absorbed by the market. By January, the extra supply of stock created by the secondary offering and the tax-loss selling pressure is likely to be over. If this stock can trade for $16 in the face of the current tax-loss selling pressure and the extra shares from the secondary offering, it will very likely trade higher in January when these issues have faded. That is why buying this cheap stock now could lead to solid gains into 2014. In spite of the lower gold prices and recent challenges Barrick has faced, analysts at Deutsche Bank reiterated a buy rating on November 1, and set a $28 price target. Investors who want to participate in a potential gold mining stock rebound as the tax-loss seeking ends, but also want reduced risks with more diversification, should consider the Market Vectors Gold Miners ETF (NYSEARCA:GDX) which has also fallen sharply in 2013.
Here are some key points for ABX:
- Current share price: $16.21
- The 52 week range is $13.43 to $36.91
- Earnings estimates for 2013: $2.61 per share
- Earnings estimates for 2014: $2 per share
- Annual dividend: 20 cents per share which yields 1.2%
Data is sourced from Yahoo Finance. No guarantees or representations are made. Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.
Disclosure: I am long ABX, AMSC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.