Good Bottom Fishing in December

 | Dec 20, 2013 | 12:30 PM EST
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As an investor, December is one of my favorite months of the year. Historically,  the month has yielded some of the best mean equity returns over the past century. One can also usually look forward to a "Santa Claus Rally", which it appears the market is currently going through.

The other thing I like about December is that it is a great time to do some bottom fishing. Sectors and stocks that have underperformed or declined during the year get jettisoned to a large degree by investors/managers who want to take losses to offset gains in other parts of their portfolios. There is also a fair amount of "window dressing" that takes place from managers that don't want these underachievers on their year-end statement to investors.

Not many sectors and stocks have declined in 2013 as the market has posted stellar returns. Here are a few temporarily beaten-down equities, however, for the patient bottom-fishing value investor.

It has been a very forgettable year for offshore driller Diamond Offshore (DO). The company has suffered through a myriad of downgrades from analysts this year and a slight drop in earnings on flat revenue from FY2012. The stock is down some 25% from its highs in the first quarter of the year and trading near 52-week lows.

There are reasons to think, however, that 2014 will be much brighter for the company.  Its long-time CEO is stepping down after over 30 years at the company. A new leader should be in place by end of the first quarter of the New Year and that could be a positive catalyst for the company and the stock.

In its last reported quarter, Diamond disclosed utilization for its ultra-deepwater rigs had increased from 75% to 93%. The company also is in the process of relocating rigs contracted to oil and gas producers with cash flow issues. This should help earnings in 2014. The stock is cheap at just over 10x forward earnings and revenues should bounce back to post a gain in the high teens in 2014.

Another stock trading at 52-week lows is real estate investment trust Health Care REIT, Inc. (HCN). This REIT is down for the year and has declined some 30% from its highs in May right before the "taper" talk started from the Federal Reserve.

Obviously, higher rates have hit the high-yield REIT sector hard. I recently added to my position in the stock as it is hitting technical support levels last seen in 2012. I also believe the recent rapid interest rate rise should moderate significantly in 2014 as the Fed has finally started the process to withdraw some liquidity from the market. This should bolster the entire REIT sector.

HCN yields almost six percent (5.7%) at current prices. The company's facilities, especially senior housing, is well-positioned from a long-term perspective to benefit from the continued aging of the domestic population.

The company should be bolstered by recent acquisitions and revenues should increase in the low teens during FY2014. Operating cash flow has more than doubled from the end of FY2010 and the REIT goes for 13x funds from operations), which is substantially below its five-year average valuation.

Buying stocks that currently are experiencing negative market sentiment is never easy. However, I have found that this strategy has provided good long-term returns and December is the ideal month to do this sort of bottom fishing.

Columnist Conversations

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I reached out last week to my close friend Ken Shreve, who is a prominent writer for the IBD.  I asked Ke...
I reached out last week to my close friend Ken Shreve, who is a prominent writer for the IBD.  I asked Ke...
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