6 year-end bounce candidates

by George Putnam, editor The Turnaround Letter

Every year around this time we see certain stocks get pushed down by artificial selling pressure related to tax-loss selling and portfolio window dressing. That pressure is removed after year-end, often causing those stocks to pop up nicely.

When the artificial selling pressure stops, many of the previous year’s dogs jump up and suddenly become investor darlings – at least for a while. 

Ultimately, longer-term fundamentals will drive the prices of these stocks, but you can often make good money from this year-end bounce pattern.

The six bounce candidates below are chosen from among the worst performers in the S&P 500 over the first 11 months of 2012.

Advanced Micro Devices (AMD) is the second largest maker of chips used in personal computers behind Intel. When the market for PCs is strong, AMD thrives, and when PC sales are weak – as they are now – AMD struggles.

The company has a fair amount of financial leverage, which magnifies the stock price moves in both directions. While AMD’s long-term prospects are unclear, the stock has good potential for a short-term bounce.

Best Buy (BBY) begins this Christmas shopping season under a cloud as investors fear that the old bricks-and-mortar retailer model cannot survive competition from the Internet. To revive its fortunes, Best Buy brought in a new CEO with turnaround credentials this past August.

Buyout rumors have added to the stock’s volatility. If the company can post decent holiday numbers, the stock could really pop in January. If a buyout came to pass, that would boost the stock even further.

Hewlett-Packard (HWP) is in the process of reinventing itself, but the bad news keeps on coming. Most recently the company announced an $8.8 billion write-off related to the 2011 acquisition of UK-based Autonomy.

We suspect the selling that took the stock down to within a whisker of a nearly 18-year low will lead to a good bounce in early 2013.

J. C. Penney (JCP) had reported lackluster results for some time before the board of directors brought in new CEO Ron Johnson in late 2011. Johnson, who was credited with visionary retailing initiatives at Apple, has made major changes at Penney. He has radically revised store layouts, products and pricing.

So far, the changes have driven away more customers than they have attracted, and this has driven away many investors as well. If there are signs of bottoming over the holiday season, that could enhance the calendar-based rebound potential.

Pitney Bowes (PBI), best known for its mail handling equipment, is struggling to find a niche in the digital age.  Moreover, recent strategic acquisitions have leveraged the balance sheet. But decent cash flow suggests that the company isn’t going away any time soon.

The stock has been quite heavily shorted; a calendar-based bounce might force some short sellers to cover their positions, thereby pushing the stock up further.

R.R. Donnelly (RRD) is the nation’s largest printer of a wide range of products, including catalogs, inserts, magazines, books and financial documents. Clearly, traditional printing is not a growth sector in this increasingly digital world.

Donnelly is making acquisitions to better align its product offerings with customer demand, and strong cash flow is buying management time to transition operations. At any rate, the company will certainly be around long enough to have the potential for a good year-end rebound in its stock.

Learn more about this financial newsletter at George Putnam, editor The Turnaround Letter.

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