4 stocks positioned for bounce

John Dorfman
| Tuesday, Nov. 20, 2012, 12:01 a.m.

A year ago, I recommended four stocks that I thought were ripe for a January bounce.

Those recommendations were a big success – and a colossal failure.

Let me explain. The four stocks I picked – Hospira Inc., First Solar Inc., Iridium Communications Inc. and Dreamworks Animation SKG Inc. — did indeed rebound in January. In fact, they shot up 12.3 percent, almost triple the 4.5 percent rise in the Standard & Poor's 500 Index.

That was the good news. The bad news was, they were only good for January. For the 12 months after publication of my column, they fell 17.5 percent, while the S&P advanced 10.4 percent.

Now, I never said the stocks would be good for a 12-month run, but the truth is, that was my intention. When I recommend candidates for a year-end bounce, I try to find stocks that will be good both for the short term and for the coming year.

It's unwise to focus myopically on the traditional “January rebound” in depressed stocks. Sometimes the rebound doesn't show up at all. And sometimes it shows up, but it happens in December instead of January.

The turn-of-the-year bounce in laggard stocks is a tax-driven phenomenon. Investors often sell their poor performers in the fourth quarter to record tax losses. Mutual funds typically complete their tax selling by the end of October, when their fiscal years typically end.

This tax-motivated selling drives some stocks below their intrinsic value, creating opportunities for alert investors.

Over the years, I have written nine columns recommending stocks that I thought were victims of tax selling (2000-2006, 2009 and 2011). Five of the nine lists have beaten the S&P 500 during a 12-month span, and five of the nine have been profitable.

The average 12-month gain on my bounce candidates has been 4.3 percent, compared with 4.6 percent for the S&P.

That record is not nearly as good as that of my quarterly Casualty List, which recommends fallen stocks. But I'm undaunted and ready to try again.

Here are four stocks that have been battered by tax selling this year, and that I believe have good potential for a comeback in the coming 12 months.

• Occidental Petroleum Corp. (OXY), based in Los Angeles, is the fourth largest U.S. oil company by market value. Its stock has fallen 21 percent this year through Nov. 16. Part of the stock's weakness comes from the rebellion in Libya, where Occidental had a cozy relationship with ousted dictator Moammar Gadhafi.

As war raged, U.S. companies such as Occidental withdrew their workers from Libya, and oil production plunged. But investors may be overlooking the fact that less than 2 percent of Occidental's revenue comes from Libya.

• GT Advanced Technologies Inc. (GTAT) of Nashua, N.H., makes furnaces that purify silicon so enable the manufacture of computer chips and solar panels, and furnaces that are used to make artificial sapphires used in light emitting diodes (LEDs).

GT shares have been hurled out the window this year – down 57 percent. Chinese competition is the problem. But now that the stock sells for less than three times earnings, I think it has been punished too severely.

• Guess? Inc. (GES), based in Los Angeles, makes blue jeans and other clothing. From under $2 in 2002, the stock climbed to about $47 at its peak in 2010. The brand was trendy, and consumer liked its hot, sexy advertising.

But Guess has cooled off. As of Nov. 16, the shares fetched about $23, down 23 percent this year after a 35 percent drop last year. Sales and earnings in the current fiscal year are expected to decline.

But I like it that Guess is debt free, and I like the stock's valuation at nine times earnings. The dividend yield is good, at 3.5 percent.

Smacked down 61 percent this year, Key Energy Services Inc. (KEG) is a jack of all trades in oil field services. The Houston company provides well completion, well maintenance, overhaul, trucking and other services to drillers.

This is probably the most speculative pick in the lot. The stock is long past its glory days. It sold for more than $32 in 1997, but lately trades at about $6. Earnings are erratic, but the company has been profitable eight of the past nine years.

After this year's pummeling, the stock looks very cheap. It sells for seven times earnings, 0.73 times book value (or corporate net worth per share), and 0.5 times sales.

John Dorfman is chairman of Thunderstorm Capital in Boston and a syndicated columnist. He can be reached at jdorfman@thunderstormcapital.com.

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