Year-end selling is hitting these 7 stocks. How their tax loss can be your gain.

MW Year-end selling is hitting these 7 stocks. How their tax loss can be your gain.

By Michael Brush

Foot Locker, CVS Health and Charles River Laboratories are among hard-hit stocks that look ready to recover

Hard-core investors hunt for stock-market castoffs every holiday season. Specifically, they look for stocks that fell so much during the year, they get hit by waves of tax-loss selling from investors wanting to offset capital gains.

This "tax loss selling" turns banged-up stocks into bargains. To round up names, I recently checked in with four money managers. Stock candidates needed just two qualifications. The stocks had to be down a lot this year - to trigger the tax-loss selling. And the money managers had to be able to make the case that these shares had a good chance to rebound over the next year or two.

Quick traders might also exploit a different angle. These stocks could see a rebound in early January, as the heavy tax-loss selling subsides. This is a tactic commonly used by several traders I know.

The money managers collectively highlighted these seven stocks:

1. Foot Locker: Foot Locker $(FL)$ got knocked off its perch as a leading sneaker retailer three years ago when Nike $(NKE)$ decided to cut out intermediaries and sell direct to consumers.

Nike's move did not work out well, so now it's partnering with retailers again, including Foot Locker. Nike realized "they need retail partners to reach people who do not buy online," Allspring Special Mid Cap Value fund WFMIX portfolio manager Bryant VanCronkhite said in a recent interview.

This should help Foot Locker make a comeback. Under new management since late 2022, the company is building relationships with vendors including Birkenstock $(BIRK)$ and Ugg , and overhauling its aging stores. Foot Locker is also improving its online retail platform and loyalty program. These changes should help produce sales growth. Says VanCronkhite: "The market is giving them too little credit."

2, CVS Health: CVS $(CVS)$ has used acquisitions to become a health care conglomerate. It's now a pharmacy benefit manager, an insurer via its Aetna division, and a healthcare service provider.

CVS shares are under pressure in part because of the constant threat of healthcare reform. But it's a business with decent growth. Sales grew 6.3% year-over-year in the most recent quarter to $95.4 billion, beating estimates. CVS could see improved growth, because the Aetna insurance division is now in turnaround mode.

With CVS stock near a 10-year low, John Buckingham at The Prudent Speculator thinks the combined valuation of its parts well-exceeds the market value. He thinks strong cash flow, restructuring and potential growth make CVS a compelling name for patient value investors.

3. Charles River Laboratories: Excess capacity in biotech research services has put downward pressure on pricing at Charles River Laboratories $(CRL)$ and other providers.

But VanCronkhite at Allspring Global Investments believes the company's stock is poised for a comeback. "Clients are about to reestablish their development programs," he says, which should boost revenue growth and as a result bring new investors.

4. Valaris: Investors have sold offshore energy drilling companies because of concerns about project delays and supply-chain issues. So now oil companies have pushed back offshore-well development.

But this is only a temporary setback, for the next six months or so, says Robert Robotti of Robotti & Company Advisors. "There has been lull in timing of the activity, but no projects have been cancelled," Robotti says. He believes that drilling activity will pick up in 2025 to start a two- or three-year cycle.

If he's right Valaris $(VAL)$ could rally from its severely depressed levels. The stock trades at just three times trailing earnings, or 91% below its five-year average, according to LSEG. Robotti says the company sells for around 35%-50% of what its assets are worth.

On the supply side, two factors favor Valaris. Companies in this business are reluctant to build new drilling vessels, because they are expensive. Second, rival Seadrill $(SDRL)$ could get acquired by one of the three other big players in the space. That would mean 75% of drill ships would be controlled by just three companies. These factors would contribute to more realistic pricing.

5. Interfor: The shares of this Canadian lumber company are down sharply this year because of weak lumber prices. Robotti says Interfor's (CA:IFP) (IFSPF) assets are worth three- to four times its current enterprise value. What could bring the stock back? Housing shortages in the U.S. due to chronic undersupply, plus population growth, suggest a pickup in home construction. The demand will boost lumber prices, especially because fires and beetles have destroyed many trees in British Columbia, which limits supply.

Two small-cap candidates

Small-cap stocks can be risky. Their relatively low trading volumes mean the shares can get pushed around a lot. But this is what makes small-caps potentially good year-end tax-loss selling candidates. The tax-related selling can impact share prices more than it would with larger-caps.

For help identifying potential small-cap winners once tax-loss selling subsides, I turned to Michael Corbett, the CEO of Perritt Capital Management, which specializes in smaller companies. Aside from a potential rebound as selling subsides, small-cap stocks could see new strength because they've been so overlooked. "They have been ignored," Corbett says. "They are so cheap, it's ridiculous."

6. DLH Holdings: DLH $(DLHC)$ offers technology- and health-care outsourcing services to government agencies. The company says it has a pipeline of potential business worth $4 billion. Corbett thinks DLH could collect $1 billion of that over the next three- to five years. Adding $100 million to $200 million a year to annual sales of $395 million would catch investors' attention. A risk here is that the company has a lot of debt, but Corbett thinks it has the cash flow to manage it.

7. Aviat Networks: The shares of this microwave and wireless network services provider are down substantially, because of what Corbett believes is a temporary pullback in spending on its services by a major telecom provider. Aviat Networks $(AVNW)$ insists the delay will last one- or two quarters, Corbett notes, "and then business should improve." A return to Aviat's prior earnings pace is possible, he adds, which could give the stock a boost.

Michael Brush is a columnist for MarketWatch. Brush writes a stock newsletter called Brush Up on Stocks. He has no positions in any of the stocks mentioned in this article. Follow him on X @mbrushstocks.

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-Michael Brush

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December 21, 2024 08:27 ET (13:27 GMT)

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