On the Prowl for Losses to Harvest

 | Dec 09, 2013 | 5:00 PM EST  | Comments
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We are moving ever closer to the end of the year, and this raises the prospects of tax-loss selling in earnest. Most stocks have gained for the year, so it's going to be tough to find losses to harvest. As a result, those few names that are down this year could see heavy selling in the last few weeks of 2013. It is hard to be selective if you need losses right now, as there simply aren't many candidates for it. As contrarian value investors, over the next few weeks we'll need to keep our eye out for abnormal down moves on higher-than-usual volume in stocks that are selling for lower prices vs. their asset value. We may well find tax-loss bargains to pick up at artificially low prices.

If you run a screen for stocks that have actually declined this year, you will immediately see that almost all of the precious-metals miners are on the list. As inflation has refused to rear its ugly head, and because the world didn't end, we saw slower investor demand for gold. ETFs were also engaged in selling due to short-term bets on metals, which has also increased physical supplies at certain points during the year. Jewelry and industrial demand for metals has actually hung in there, but speculative selling has pushed the glittery stuff to new lows, and the mining stocks have followed it lower.

I have no idea what metals may do next year, but when I look at silver miners like Pan American (PAAS), Hecla (HL) and Couer (CDE) at this point, they look like very cheaply priced businesses to me. All three stocks will do very well if metals just stop declining, and they could be stunning gainers if the metals reverse course and go higher over the next few years. All three are down big this year, and I would use any heavy tax-related selling to buy the shares.

When you move away from the miners, you'll find some interesting special-situation stocks that are down big this year and could see some year-end selling pressure. Harvest Natural Resources (HNR) has struggled for the past year to find some way to dispose of its Venezuelan assets without taking a total loss on them. Now it looks as if the company has finally reached a deal with Pluspetrol Venezuela to sell them in a series of transaction worth $400 million. The company also just sold a little over $5 million in stock to 12 buyers, six of whom are officers and directors of Harvest Natural.

Harvest Natural's CEO, James Edmiston, said this in last earnings release: "In the near term, the Board and Management will remain primarily focused on a sale of the asset base of the Company in whole or in parts and a return of the proceeds to its shareholders." The value of the assets could easily be worth twice or more the company's current market capitalization, so I would be interested in buying these shares if we saw some uninformed tax-loss selling in this stock over the next few weeks.

Among the larger-cap names, there are some interesting issues on the potential selling list. I think a spurt of selling in shares of BlackBerry (BBRY) might be the final catalyst for me to buy the stock. As I mentioned Friday, the company probably has a future selling its super secure smartphones to enterprise and government customers. I have no interest in shares of retailer J.C. Penney (JCP), as I think there is a good chance this company simply won't make it -- that it will disappear from the landscape over the next few years. It may be cheap, but there is nothing even vaguely resembling a margin of safety for it.

Atlantic Power (AT) is another company that would likely end up in my portfolio if we saw additional selling in the shares this month. The power-generation firm has some interesting assets and trades at just 60% of book value at the current quote. It is quite likely that the current 11%-plus dividend yield will go away -- something that should also spur some selling in the stock early next year.

Atlantic Power has solid long-term contracts with major utilities to provide power, and the majority of its products can be classified as "green" energy. The company has some financing issues, but a continued price decline could create a margin of safety, given the size of the asset base.

Again, this time of year can create some crazy pricing situations in the markets as hedge funds try to ramp stocks into the year-end, and as institutions and individuals alike search for tax losses to offset the gains from this strong year for equities. As value investors, we need to watch for these and take advantage of mispricings as they occur.

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