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Five Tax Loss Selling Candidates to Put in Your Shopping
Bag This Holiday Season
By Michael Brush
December 19, 2005
We can’t let the year go by without applying our insider intelligence to a
regular end-of-year activity for investors and traders alike: Picking up
beaten down tax loss selling candidates on the cheap.
At the end of each year, many investors sell the year’s losers and “take
losses” so they can match them up against gains and reduce their tax bills.
This puts unusual downward pressure on stocks, pressure which may ease as
the new year begins.
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As usual when buying beaten down names, the trick is to avoid the notorious
“value trap,” that is, the purchase of beaten down stocks that look cheap –
but only stay cheap or get cheaper. How do we know which beaten down stocks
from 2005 actually will come back?
We don’t.
But buying those which the insiders have been snapping up will definitely
tilt the odds in our favor.
To find this season’s best tax loss selling candidates, I took two steps.
First, I’ve scanned the smaller cap names to find stocks with some of the
best insider buying profiles in recent weeks, according to my system. From
that group, I selected the stocks whose charts look the ugliest for the
year. A stock that’s now trading at or near its low for the year has the
most shareholders underwater for the year. So they are more likely to be
selling in the final days of the year to generate those tax losses.
Some of these names could begin to spring back right away in December once
the tax loss selling pressure eases, and fresh 2006 retirement account money
starts pouring into the market, looking for a home.
But as usual when following the insiders, it’s better to buy these instead
with an eye for gains at some point in 2006 or 2007 – because insiders by
nature tend to buy well ahead of the trends they think they see coming. In
short, be patient with these names. But if you buy a group of them, the odds
are good you’ll see a payoff that beats the market with ease over the next
18 months to two years.
Here’s this year’s crop of tax loss selling candidates.
GTX (GTXI)
has fallen so hard this year, virtually anyone who purchased shares of this
biotech company is now underwater. That’s a lot of potential sellers. But
the buyers late this year include a director who purchased $744,000 worth of
the stock in December. Directors also purchased over $10 million worth of
stock back in October as part of a follow-on offering.
GTX is working on products that may prevent prostate cancer, treat the side
effects of androgen deprivation therapy for advanced prostate cancer, and
help with weight loss and muscle wasting associated with severe burns and
cancer.
Chemtura Corporation (CEM),
a specialty chemical company, saw its shares blow up in September when it
announced poor results for the third quarter. The stock has rebounded from
the lows it hit in October, but many people who bought this year are still
looking at losses. Their selling is putting downward pressure on the stock
right now. Insiders, however, have been actively buying in the $12 range –
or near current levels.
Restoration Harware (RSTO)
was a stock I featured here back on April 20 at just the right time (http://nanotechnologyinvestment.com/insiderscorner/Articles/Restoration_Hardware.asp).
Within three months this upscale home furnishings retailer had gained almost
50%. But now it’s back down to levels near where I first wrote about it,
because of a slowdown in sales growth. Insiders, however, are buying again
in a big way. One director, for example, has purchased about $4.8 million
worth of the stock in the $5.40 to $6.50 range in the pull back. That’s a
bullish signal if there ever was one. The retailer looks cheap again, with a
price to sales ratio of .42.
ActivCard (ACTI),
which makes digital identity systems, has had such a tough year the stock is
now trading down near its cash-per-share levels. How much lower can it go?
After all, with $3.49 per share in cash, managers could close the company
and hand over all the money to shareholders without causing them much damage
– because the stock recently traded for $3.58. One insider recently plunked
down $759,000 to buy 215,500 shares. The company is changing its name to
ActivIdentity.
UTStarcom (UTSI),
a major supplier of wireless and DSL equipment to Chinese telecommunications
companies, has gotten pummeled this year. Shares have been slammed to $8.45
from $22. Around $8, a director bought nearly $400,000 worth of stock. The
shares are cheap, at .33 times sales.
The bottom line: Buying these stocks now puts together two strategies
that can give you an edge in the market: Picking up tax loss selling
candidates and following the insider cues. I think all of these are buys
right now for decent gains as a group in 2006 or beyond.
Disclaimer
At the time of publication, Michael Brush did not own or control shares in
any of the companies listed in this column. Mr. Brush is an independent
columnist for this web site.
For more on Insiders Corner disclosure, see the disclosure section in About
Insiders Corner:
http://www.investorideas.com/insiderscorner/. InvestorIdeas.com
Disclaimer:
www.InvestorIdeas.com/About/Disclaimer.asp. InvestorIdeas is not
affiliated or compensated by the companies mentioned in this article.
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