Just because 2009 turned out to be a good year for stocks, selling for tax loss purposes could still set up a nice January bounce.
Most of the time, we focus on fundamental business factors that affect the values of particular stocks, but at this time of the year, we often see artificial selling pressures that may present buying opportunities almost regardless of stock fundamentals. These selling pressures come from two sources: tax loss selling and portfolio window dressing. The sharp swings in the market over the last 15 months or so may create some particularly interesting year-end opportunities this year.
Tax loss selling comes about when investors sell their losers to generate taxable losses to offset other gains. This year most investors probably still have many losers in their portfolio, left over from last year's market debacle, but with the sharp rebound in the stock market since March, many investors probably have gains to offset as well.
Portfolio window dressing comes about when professional managers look over their funds as year-end approaches and notice that some of their holdings are showing big losses. They think about how bad it would look to have those big losers show up in their annual reports, and so they sell the offending positions to get them out of the portfolio before it is memorialized at year-end.
Loss of patience also comes into play as investors, both individual and professional, look over their portfolios at this time of year. When investors are looking for things to sell this year, they may be willing to give a little more time to stocks that fell sharply in 2008, but they are probably getting tired of waiting for stocks that have been in a multi-year decline, and those will be the most likely candidates for yearend sales.
When the new trading year begins, this artificial selling pressure disappears, causing many of these losing stocks to become at least short-term winners. Sometimes this yearend bounce will get certain stocks back into the limelight, and they will continue to go up for a prolonged period.
This strategy doesn't always work, but it often does. For example, the nine yearend bounce candidates that we highlighted at this time last year have gained an average of 66% since we wrote them up, compared to the 24% gain in the S&P 500 over the same period.
The stocks discussed below have generally been in decline for several years, and have only rebounded modestly from their 2008-2009 lows. While they each have their problems, they also have characteristics that could eventually make them winners again.
Boston Scientific ( BSX - news - people ) makes a range of medical devices. The bulk of revenues are derived from cardiac rhythm management devices and coronary stents. Boston Scientific was on a roll as the century began, but, beginning in 2004 with a stent recall, the company has had a string of problems. However, a new highly regarded CEO, Ray Elliot, took over the reins in June, and the company has substantial assets and long-term opportunity.
Brink's ( BCO - news - people ), a provider of secure transportation services, has felt the brunt of the economic downturn in large part due to its ties to the financial industry; sluggishness in the diamond and jewelry markets have also crimped results. Brink's sold off its home security division in November 2008 to focus on its core business. Operations have been consistently profitable and throw off solid cash flow. And the company has good growth potential overseas.
Citigroup ( C - news - people ) was at the epicenter of the financial meltdown of 2007-08 and was essentially bailed out by the U.S. government. The company is actively restructuring its many businesses to reduce risk and restore profitability. While Citi still has a lot of cleaning up to do, its numerous strong franchises and global reach give the company the potential to be a world financial leader once again.
Eli Lilly's ( LLY - news - people ) portfolio of prescription drugs treats a wide range of conditions, including depression, pain, schizophrenia, diabetes, osteoporosis and cancer. Wall Street is concerned that Lilly hasn't yet shown how it's going to replace the profits from its numerous drugs that will lose their patent protection in the next few years. As a result, investors have pushed the stock down to just 8 times expected earnings and a 5.4% yield. Lilly still has a strong commitment to R&D, and it could surprise the analysts down the road.
Integrated Device Technology's ( IDTI - news - people ) low-power semiconductors are used in communications, computing and consumer products. In recent years, the company has shifted its product mix to focus more on advanced products for the communications area. Aggravated by the economic downturn, the shift hasn't been very smooth, but management considers the company's pipeline to be full of innovative products with strong potential. The balance sheet shows no long-term debt, and the company expects to finish the year with about $370 million in cash. More patience here could be well rewarded.
KB Home ( KBH - news - people ) has suffered along with the entire homebuilding sector, but it was particularly hurt by its exposure to California and Florida. However, KB has cut costs sharply, including laying off 75% of its staff. Emphasis on the lower-middle range of the market should help it going forward. With more than $1 billion in cash and no serious debt maturities until 2011, KB looks quite capable of surviving even this historic housing downturn.
Level 3 Communications ( LVLT - news - people ) has spent most of the last quarter century building one of the world's largest fiber communications and Internet backbones. It has been a capital-intensive project that's saddled the company with a heavy debt load, and revenue growth has been slower than expected. It remains to be seen whether Level 3 can grow its business fast enough to support its highly leveraged capital structure, but with most of its debt maturing in 2013 and beyond, the company still has some runway left. Regardless of its long-term prospects, the stock could take a nice short-term bounce in January.
Molina Healthcare ( MOH - news - people ) provides Medicaid health plans. While revenues have risen overall, the company has experienced pressure on its profit margins. California's has been a particular problem as the state has prevented the company from fully recovering its costs in that important market. The H1N1 flu virus has also adversely affected operating results. The stock has woefully underperformed the market this year, but it still has solid financials and even some takeover appeal. At 0.16 times sales, Molina is attractively valued.
The New York Times continues to struggle along with all of the other newspaper companies. While a cyclical recovery in print sales may eventually materialize, the ability to generate online revenues is key to long-term success. Dramatic cost cutting has helped maintain profitability, and there's minimal debt maturing before 2011. If any newspaper companies are going to survive, the New York Times will certainly be one of them.
Wendy's ( WEN - news - people )/Arby's Group is the result of the September 2008 merger between two struggling fast-food chains. Management expects to eliminate $60 million in annual costs by the end of 2011. While both chains suffered during the economic downturn, the combined company has the scale and the brands with which to launch a comeback.