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Stocks trampled in one year often come back to life in January of the next.
This January bounce is largely tax-driven. Investors often sell their losers in the fourth quarter, aiming to reduce their taxes. In the process, some stocks are punished too harshly, and become prime candidates for a rebound in the new year.
A tax cut in 2018 is a possibility. So, many investors are eager to sell their losers this year because deductions may be worth more in 2017 than in 2018. Even Warren Buffett has said he’s doing it–and he normally scorns tax-driven trades.
That’s why I suspect the January bounce in 2018 will be a high one. Here are five stocks I think could benefit. My goal on these is a solid gain over a 12-month period, not just in January.
Down a sickening 48% in 2017 (through Nov. 17), Bed Bath & Beyond (BBBY) now sells for about $21 a share, down from more than $70 in the summer of 2015. Today’s price is a mere seven times the earnings analysts expect in the current fiscal year.
Those earnings will probably be the worst in several years. Clearly, this is a struggling chain. Yet its return on stockholders’ equity in the past four quarters has been 21%, quite creditable.
It’s convenient to order your sheets and towels online from Amazon. But there must be an equilibrium level between online shopping and seeing the merchandise in person. And that equilibrium point is not going to be 100% online. Meanwhile, the company is slowing establishing its own online business, which now accounts for about 15% of sales.
CVS (CVS) and other drugstores have one advantage that most retailers lack: foot traffic from people who come to pick up a prescription and stay to buy crackers or laundry detergent.
CVS shares, down about 10% this year in a rising market, now sell for less than 14 times earnings and yields 2.8% in dividends. You’d never guess that this is a company that has grown its earnings at an 11% annual clip over the past decade.
All three big auto parts sellers–Advance Auto Parts (AAP), AutoZone (AZO) and O’Reilly Automotive (ORLY)–have been jolted as Amazon entered the auto parts market this year. My pick is Advance Auto Parts because I judge its balance sheet by far the strongest of the three.
Advance Auto shares are down 47% this year and sell for about 17 times earnings. I think it can outlast some of the competition and perhaps recover some pricing power.
Fuel costs and labor costs, the two big bugaboos for airlines, may rise in 2018. One airline that analysts expect will earn less in 2018 than in 2017 is Hawaiian Holdings (HA), based in Honolulu.
Shares are going for less than seven times earnings following a 34% decline this year. The current price seems to me to adequately discount the risks. Airline profits and stock prices tend to be volatile, and Hawaiian more than most. But I think this is a good speculation.
Down 20% this year is fertilizer producer Terra Nitrogen (TNH), which is majority owned by CF Industries Holdings (CF). Earnings for both Terra and its parent are down this year, but Terra remains profitable while CF has tipped into a loss.
Terra tends to appeal to dividend-conscious investors. It currently sports a 6.6% yield, but the dividend has been cut several times since 2013, and may need to be cut more, in light of faltering earnings.
Why, then, would one be interested in Terra? The company is debt free. In good years (such as 2011-2013), it has posted profits exceeding $15 a share. For an $82 stock, that equates to a price/earnings ratio of less than six.
Beginning in November of 2000, I have written 14 columns recommending January bounce candidates. (The one you’re reading is the 15th.) The average 12-month gain on my picks has been 13.3%, versus 8.5% for the Standard & Poor’s 500 Index.
Nine of the 14 columns have been profitable and eight have beaten the S&P 500.
Last year’s crop achieved a one-year return of 61.1%, thanks to outsized gains in Myriad Genetics (MYGN) and First Solar (FSLR). The index returned 20.0%.
Bear in mind that my column recommendations are theoretical and don’t reflect actual trades, trading costs or taxes. Their results shouldn’t be confused with the performance of portfolios I manage for clients. And past performance doesn’t predict future results.
Disclosure: My firm owns Myriad Genetics, First Solar and Terra Nitrogen for some of our clients.
John Dorfman is chairman of Dorfman Value Investments LLC. His firm or clients may own or trade securities discussed in this column. He can be reached at email@example.com.