WASHINGTON, December 28, 2017: In the 1980s when I worked as a stockbroker for a well-regarded regional brokerage firm (since merged with another). During that time, I eagerly looked forward our analysts’ annual list of year end bounceback stocks.
Year end bounceback stocks? Yep. Engaging with stocks in this area can often prove quite profitable either just prior to or just after the turn of the current year.
Quite simply, a year end bounceback stock candidate is an otherwise well-regarded company whose business – and shares -have endured an awkward, negative or horrible year. This tends to drive the price of the company’s shares down well below any reasonable price level. Because of that, and for tax-loss purposes, investors and funds holding these stocks tend to dump them wholesale.
This activity can commence as early as the beginning of November and tends to intensify after Thanksgiving, lasting until the selling exhausts itself in late December
As these investors sell (and sometimes short) vast quantities of these shares, per-share prices are driven violently, relentlessly and irrationally downward.
Often – although certainly not always – these brutally battered stocks can be a good-to-great buy in late December or early January of the new year. Since they’ve been “oversold” – driven down to prices that are irrationally lower than what they’re objectively worth – such stocks often rebound sharply when, at the stroke of midnight, January 1, the selling pressure ceases.
Given the rampant speculation running up to Congressional passage of the 2017 tax reform legislation, it seemed to me that stocks on the big-time sell list this year were more brutally savaged than usual. It would seem that many investors, funds, etc., didn’t want to take any chances that changes in the tax code would rob them in 2018 if they didn’t take their tax-offsetting losses before the end of the year, using provisions in the current tax code.
It doesn’t look like much has changed in this regard, however. Yet we sit here at the end of the year, looking at a short list of stocks that have been oversold with a vengeance. Pinpointing the best of them, we’ve checked out the work of numerous analysts and offer our selection of 2018 year end bounceback stocks.
Again, these are stocks that have been slaughtered by sellers during Q4 2018. They are (in analysts’ opinions and in my opinion) so horribly oversold that they offer an excellent probability of a quick and sharp jump upward in early 2018. According to one well known investment periodical:
“Barron’s columnist Mark Hulbert searched for the 10 S&P 500 stocks with the biggest year-to-date losses through October 27, and with prices lower than 24 months before. They had to be reasonably sound businesses, not headed for bankruptcy, paying dividends, and with below-market forward P/E ratios and price to book value (P/B) ratios.
“Hulbert modeled this process on one developed by George Putnam, editor of the Turnaround Letter.”
Culled from various sources prominently including Barron’s, here’s my somewhat arbitrary list of the best year end bounceback stock candidates between now (December 28, 2017) and, perhaps, the 10th of January 2018. Remember, nothing is guaranteed. And be sure to read my caveats, which follow this list.
2018 Year End Bounceback Stocks: Top Picks
Foot Locker (FL). This well-known shoe retailer had less than a stellar Q3 and openly anticipated a poor Christmas selling season due to extraneous factors. Sitting at $47 and change as we write this and offering a stable 2.6 percent dividend, this one could recover nicely after the first of the year if the retail athletic shoe gods smile upon the stock just a bit.
Advance Auto Parts (AAP). After several rocky quarters, this Roanoke, Virginia-based national chain of auto parts stores may be getting back on track now that it’s being influenced by an activist investor and an aggressive new CEO. Shares have plummeted some $70 apiece since January 2017. The waterfall decline, which began when the share price was around $177 at the beginning of the year, bottomed out in November at around $78 per share. Supply chain issues are now being repaired and shares have already rebounded to around $99 per share as we write this.
Kroger (KR). Like the majority of grocers and retail chains, Kroger’s shares were battered soundly early in the summer of 2017 when Amazon (AMZN) announced and quickly executed its buyout of Whole Foods. AMZN promptly offered aggressively competitive pricing on many items in the company’s new acquisition, a virtue-signaling, largely “organic” grocer formerly known to its trendy and/or wealthy shoppers as “Whole Paycheck.” As a result, the retail sector took a header without rhyme or reason. Kroger tanked, but so did home improvement giant Home Depot (HD). Investors and funds just dumped them all in a massive wave of panic selling. We made money buying Home Depot at the bottom, but held off on the grocers for awhile. Kroger is a dominant power in the grocery sector, and we suspect it will continue to innovate and compete in this wickedly low-margin business in 2018, Amazon notwithstanding.
Macy’s (M). Perhaps the time to have bought this granddaddy of all department stores was when things looked gloomiest. That happened just prior to Thanksgiving Day 2017 when this stock hit its post-Amazon announcement low of $17.40 per share. When news trickled in that this year’s retail Christmas was turning out to be the best in years, a well-prepared and carefully downsized Macy’s attracted buyers in droves. Its shares currently sit at $25.57 as we write this. Its PE Ratio sits at a utility-like $7.43 per share. Plus, its dividend, which appears to be stable, is currently a whopping $5.89. What, did Kris Kringle return to Macy’s flagship midtown Manhattan store?
Viacom (VIAB). This media and content giant is beginning to emerge as an interesting investment again after years of boardroom chaos. Like Macy’s, the company currently sports a ridiculously low PE 8.37, and offers a reasonably decent and secure 2.58 percent dividend. The company is well prepared to go wherever streaming media will take it in coming years, but its traditional film business, largely run under the Paramount label, remains strong as well. Recovering from a recent $22.13 per share low, it’s already bounced back to around 30 and looks to go higher in the new year.
Alaska Air (ALK). In many respects, this regional carrier has been a superstar for years in the highly competitive and highly dodgy airline industry. The stock peaked at around $111 last spring before plummeting to $61.10 in early November 2017. It’s since bounced back to the $74 range as we write this and looks to go higher in 2018. With a PE around 11, and a teensy dividend of 1.61 percent, the stock could get back up to $90 or so if it continues to perform as well as it has in the past. One caveat: rising fuel prices always affect profitability. So if WTI (West Texas Intermediate crude) exceeds $60 bbl. and stays there, investor optimism in the airline sector could suffer accordingly.