(Editors' Note: This article covers a micro-cap stock. Please be aware of the risks associated with these stocks.)
During my latest appearance on CNBC’s Stock Brawl on Monday, I railed against the practice of buying overvalued stocks and hoping they’ll one day grow into their valuations. That’s a fool’s game. Especially five years into a rip-roaring bull market.
Instead of overpaying, we should (always) be on the hunt for undervalued names with solid growth prospects. After all, as Warren Buffett famously said, “Price is what you pay; value is what you get.”
Granted, that’s easier said than done presently, given that roughly 90% of stocks in the S&P 500 Index rallied last year. But it’s not impossible. Because, believe it or not, the most compelling bargains right now can be found by digging through other investors’ trash piles.
I shared earlier this week that the end of a historic year for stocks prompted a spat of indiscriminate selling in an effort to harvest tax losses, setting the stage for a strong bounce back in the weeks ahead. And as I promised then, here are six tax-loss treasures worth adding to your portfolio right away …
Tax-Loss Buying Opportunity #1: JDS Uniphase Corp. (JDSU)
JDS Uniphase, a $3-billion market cap company, is one of only 48 stocks in the S&P 500 to fall in price in 2013. Most of the bleeding came during the fourth quarter, too, thanks to a weak quarterly report. However, the leading provider of communications test and measurement solutions appears to be on the brink of reporting a strong quarter.
Recent channel checks by Stifel Nicolaus’Patrick Newtonsuggest that the company is experiencing strong sales momentum “across a meaningful portion of its product portfolio.” So much so that Newton felt the need to reiterate his “Buy” rating on the stock.
The company has also been on an acquisition spree. Most recently, it scooped up privately held Network Instruments, which enhances its overall market opportunity by a healthy $1 billion. Ironically enough, JDS Uniphase might go from being the hunter to the hunted.
On the heels of Apple’s (NASDAQ:AAPL) recent purchase of 3-D sensor company, PrimeSense, JDS Uniphase is now the last publicly traded leader in gesture recognition technology. And the impetus for a deal is only strengthened given that the stock is trading within spitting distance of its 52-week low. I suggest you act before deep-pocketed institutions and/or corporations do.
Tax-Loss Buying Opportunity #2: Jabil Circuit, Inc. (NYSE:JBL)
Jabil ranks as another rare loser in the S&P 500. It, too, fell from grace in the closing month of the year. But it would be inaccurate to suggest that its precipitous mid-December decline was caused entirely by tax-loss selling.
In a call with analysts, CEO Mark Mondello did reveal an unexpected shift in demand from one of its key customers. However, tax-loss selling undoubtedly contributed to the decline. Here’s the thing – the sales downturn isn’t permanent. As Mondello indicated, “[It’s] significant but assumed to be temporary.”
If we take a slightly longer-term view, we realize that the company is still on track to deliver earnings growth of 50% in the current fiscal year. Such strong profit growth is all the more compelling when we realize how cheaply shares are trading. At current prices, Jabil carries a price-to-earnings (P/E) ratio of only 9.6.
That’s equal to roughly a 50% discount to the industry average and the S&P 500. I assure you, steep bargains like that won’t last long into the New Year.
Tax-Loss Buying Opportunity #3: Walter Energy, Inc. (NYSE:WLT)
Forget about being universally shunned. Coal spent much of 2013 being downright hated. It’s no surprise, then, that shares of Walter Energy – a leading supplier of metallurgical coal for the global steel industry – got clobbered, dropping more than 50%.
As I shared before, the stage has been set for conditions in the coal industry to go from bad to less bad. It’s happening. Just read the latest management comments from Peabody Energy Corp. (BTU). I’m no longer the lone contrarian on coal anymore, either. The analysts at Citibank believe a rebound is imminent, with Walter being the prime beneficiary in the “met” coal market. I agree!
Even more telling, insiders purchased 116,120 shares of Walter over the last six months at an average price of about $18 (the stock currently trades for about $16.80). I recommend you follow their lead, stat!
Tax-Loss Buying Opportunity #4: Fusion-io, Inc. (NYSE:FIO)
I’ve previously singled out Fusion-io as an attractive way to play the “Big Data” boom. Its software and hardware solutions allow customers to quickly and efficiently process and analyze data. Shares were already down more than 50% heading into December. But that’s when the tax-loss selling kicked into overdrive, sending them down another 15% by mid-month.
In the wake of Western Digital’s (WDC) $340-million purchase of sTec in the middle of 2013, Fusion-io is naturally in the buyout crosshairs, too. That’s all the more true with shares trading below $9.
Tax-Loss Buying Opportunity #5: Cincinnati Bell Inc. (NYSE:CBB)
If Cincinnati Bell didn’t get off to such a horrendous start to 2013, plummeting 46% in the first quarter, it wouldn’t have become such an attractive tax-loss selling candidate. Beginning in October, shares embarked on a legitimate turnaround, rising more than 30%.
Thanks to a high average trading volume of 1.3 million shares per day, the tax-loss selling didn’t put a dent in the recovery. It only served to hold back prices. With the selling pressure removed, it’s time for the rebound to resume.
You see, even though Cincinnati Bell is a boring old telecom, it’s on track for an impressive earnings increase – from a loss of $0.16 per share this year to a profit of $0.13 per share in 2014. The good news? The stock is still trading at a 60% discount to the industry on a price-to-sales basis, which means there’s still plenty more room for share prices to run.
Tax-Loss Buying Opportunity #6: Eurasian Minerals Inc. (NYSEMKT:EMXX)
Remember the “Golden Disaster” I talked about a few weeks ago? Well, forget about gold bullion prices slumping 30% on the year. Junior mining stocks got whacked even more, dropping upwards of 60%, on average.
The end result? Junior mining stocks became the poster children for tax-loss selling heading into the final months of the year.
One company in particular, Eurasian Minerals, is now trading almost right where it did when the bull market began way back in March 2009. That’s absurd!
The company is well capitalized, which is a rarity in the sector. Not to mention, it owns a diversified portfolio of mineral exploration and development properties.
Bottom line: If you’re looking to get good value for your money, look no further than this list of six stocks.