8 Top Year-End Trading Ideas for Bargain Hunters

The unfortunate turn of more recent events in the stock market could be creating at least a modest flood of opportunity for contrarian investors. Indeed, as we do near the end of each year, we have identified our favorite year-end trading suggestions, says George Putnam, editor of The Turnaround Letter and contributor to MoneyShow.com. George Putnam, The Turnaround Letter This may be particularly true as we approach year-end, when artificial selling pressure, created by investors tossing their losers, offers some unusual short-term bargains. Here at The Turnaround Letter, even we can be tempted to briefly set aside our intense focus on long-term business fundamentals and underlying valuations when shorter-term bargains appear. A primary source of artificial selling pressure is the tax code. By selling losers, investors can generate taxable losses to offset other gains, saving on tax payments. The strong gains in the stock market in recent years mean investors may have significant gains to offset. Similarly, many investors flush out their losers to create a fresh psychological start for the new year. These can push already weak stocks down further. Portfolio window-dressing by professional investors creates another source of artificial selling pressure. These managers would rather not show their clients and consultants that they held some big losers, so they sell them in November and December to keep them out of year-end reports. Once the selling pressure ends with the new year, many of the previous year's worst-performing stocks bounce upwards, sometimes sharply. Nimble investors can capture some of the bounce before longer-term fundamentals and valuations take over after a month or so. Investors can also use the opportunity to start new positions in attractive longer-term investments. Described below are eight stocks that have some of the worst returns year-to-date. All are in the S&P 500 and represent a diverse roster of promising bounce candidates. Some of our Recommended List stocks have some bounce potential, as well. We would include McDermott International , Conduent and General Electric , all currently rated as Buys. If you have not yet taken a position in these stocks, or would like to add, this could be a good time to do so. Affiliated Managers Group Like many investment management firms, Affiliated Managers has suffered from outflows as clients increasingly migrate toward index products. Also, many of its products invest outside of the U.S. where market returns have been weak. The shares have lost close to half their value this year and now trade at the same price as they did in 2012. Yet, Affiliated Managers has capable leadership that oversees a diversified and high-quality stable of top investment managers in public and private equities and alternative investments, including the innovative AQR Capital Management. Its unique boutique model helps preserve its profits while keeping its managers motivated to produce strong returns. The firm's balance sheet is sturdy, supported by strong free cash flows. Applied Materials This company is perhaps the premier producer of equipment that makes semiconductors. As chips become almost impossibly small and complex, the Applied Materials market position continues to strengthen. Secular growth in chip demand is likely to remain robust, driven by the ever-increasing need for computing power. However, the industry is cyclical, with investors worrying about gluts in several types of chips. Applied Materials shares have fallen over 40% from their peak earlier this year. Applied is led by the highly-regarded Gary Dickerson, has a robust balance sheet with over $4 billion in cash nearly offsetting its modest amount of debt and is highly profitable. Coty Hopes were high when Coty announced in 2015 that it would acquire Procter & Gamble's cosmetics brands for $12 billion. However, the merger was a struggle from the start, taking nearly 16 months to close, followed by a difficult integration. Further, consumers have been leaving Coty's mass-market products for more upscale brands. All this has pulled its shares down to less than half their $17.50 IPO price. A new CEO, who successfully integrated Jacobs Douwe Egberts' large coffee acquisition, has recently joined. Trading at an attractive EBITDA multiple and offering an enticing dividend yield, it wouldn't take much for these shares to return to fashion. Halliburton One of the largest providers of services to oil and gas drillers, Halliburton has been pressured by softening demand and pricing. The sharp fall-off in oil prices has compounded investor worries about Halliburton's prospects, especially in North America. Halliburton shares, down over 40% from their early 2018 highs, are approaching their lows following the 2014 oil price crash. Yet, the company remains a pre-eminent supplier in a critical industry, while the global demand for oil isn't going away anytime soon. Halliburton's operations are highly profitable, backed by a well-capitalized balance sheet. IBM Investors are losing patience with this former technology icon as it continues to struggle with weakening revenues. After steadily falling from over $215, IBM's shares dropped nearly 25% since early October, capped by surprise and frustration over long-time CEO Ginny Rometty's massive $34 billion deal to acquire cloud-computing firm RedHat. Few investors since 2009 have a profit in IBM shares, leading to perhaps an easy sell. Nevertheless, with sentiment and valuation at low levels, the shares could be poised for a rebound, supported by the appealing 5.3% dividend yield. The Kraft Heinz Company After the profit margin enhancing 2015 merger, Kraft Heinz has fallen on less-favorable times. Like many food companies, Kraft Heinz is suffering from sluggish revenue growth and lower profits. The shares have dropped by a third this year and by nearly half since reaching over $95 in early 2017. However, the company's issues aren't existential, as its profits and cash flow remain sturdy and its balance sheet is healthy. The management is capable and focused intently on reinvigorating its revenue growth. Deal-oriented 3G Capital and Berkshire Hathaway remain major shareholders, which may mean another margin-enhancing acquisition is in the company's future. Mohawk Industries Mohawk is the world's largest flooring company, with global sales of its carpeting and tiling for residential and commercial spaces approaching $10 billion. Concerned over the slowing housing market and rising commodity costs, investors have aggressively sold the shares, which are down over 55% year-to-date. Mohawk remains highly profitable, generates considerable free cash flow and has only a modest amount of debt, most of which isn't due for at least four years. The company is well managed, and its high-quality production and distribution, along with targeted capacity increases, positions it well for the future. PG&E This San Francisco-based electric and gas utility company is facing potentially crippling legal liabilities from the devastating California wildfires. Its already-weakened shares fell by more than 50% in early November. Bankruptcy (which would likely wipe out shareholders) is a real possibility. However, as the underlying utility business is reasonably healthy, any meaningful relief from the courts or regulators could provide a sharp lift to the shares. Currently the size of the liability is unknown and depends on proof that PG&E's equipment caused the fires. Helping to buttress a case for relief are the political difficulties of forcing rate-payers to shoulder the liability as well as the risk of knock-on effects across the entire California utility industry. -- This commentary was originally published Dec. 21 on Real Money

8 Top Year-End Trading Ideas for Bargain Hunters

These eight S&P 500 stocks have some of the worst returns year-to-date and represent a diverse roster of promising bounce candidates.

Columnist Conversation

Semiconductor Sector Dynamics

Updating the DIA

Pondering These Pot Stocks

COLUMNIST TWEETS

Please Join or Log In to manage and receive alerts.