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Dec. 24, 2014, 9:17 a.m. EST

’Tis the season for buying stocks dumped for tax reasons

Solid companies have been sold to be used solely as write-offs, and you can gain from that

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By Michael Brush, MarketWatch


Bloomberg
GlaxoSmithKline has two new chronic obstructive pulmonary disease drugs, Breo and Anoro, which will rebuild the company’s respiratory business, says Connor Browne, a portfolio manager at the Thornburg Value Fund.

Shares of solid companies go on sale at this time of the year simply because it’s the season for tax-loss selling.

Tax-loss selling hits stocks that have had a bad year. Investors want to dump them to beat the tax man by booking losses to offset gains.

But, come January, the tax-loss sellers are gone, and those stocks can rebound. Short-term traders might book quick profits.

There’s no guarantee they’ll bounce right away. They might get swamped in a market downdraft. So I look at tax-loss selling candidates as discounted names to buy at an even bigger discount for potential outperformance over the next year or two.

Not surprisingly, many of the best tax-loss selling plays this year are in energy. Rather than give you straight energy plays to buy because oil will probably rebound in 12 months, as I did here, I’m suggesting a new group of stocks that are down on the mere misperception that they will be hit by lower oil prices, even though it’s probably not true.

I’ve also got a few stocks linked to housing, another sector that’s had a tough year.

First, though, let’s start with a good tax-loss selling pick in the drug sector.

GlaxoSmithKline /zigman2/quotes/209463850/composite GSK +2.28%

Top managers at the British pharmaceutical giant need a stiff upper lip. Their stock has had a terrible year. The reason: All the competition and pricing pressure surrounding Glaxo’s lead product, Advair for asthma and chronic obstructive pulmonary disease (COPD), which accounts for close to 20% of sales. This problem has had investors heading for the exits. Now, as the year closes, there’s an extra dose of selling as traders book tax losses.

Here’s the bright side for you: The tax-loss selling gives you an even better deal on Glaxo shares, which should do well over the next year or two. What’s going to go right?

First, Glaxo has two new COPD drugs, Breo and Anoro, which will rebuild its respiratory business, predicts Connor Browne, portfolio manager of Thornburg Value Fund /zigman2/quotes/200227697/realtime TVAFX -1.93% . “The handoff between Advair, and Breo and Anoro has gone worse than anyone expected, but we think they will lead to growth in the respiratory business over time,” says Browne.

Besides respiratory products, the company has three solid divisions. It’s in consumer-health products and vaccines, both of which don’t face patent expiration issues. And Glaxo has a strong HIV drug partnership with Pfizer /zigman2/quotes/202877789/composite PFE -0.01% . They jointly offer Tivicay, likely to be a blockbuster HIV drug. Browne thinks Glaxo could rise 40% over the next 12 to 18 months to hit $60. Meanwhile, it pays a 5.6% yield.

Energy

The energy-sector rout is so bad, it’s spilled over to hit a bank, several closed-end funds and a building-supply company, even though they won’t likely be hurt much by lower oil prices. That alone makes these battered names attractive. But they look even better because year-end tax-loss selling is pushing them down even more.

First, consider the odd case of ViewPoint Financial Group , a Texas bank. Its stock has fallen sharply since mid-November on concerns about weak oil prices. Texas means oil, right? So this bank has to suffer, goes the logic. Wrong.

/zigman2/quotes/209463850/composite
US : U.S.: NYSE
$ 34.53
+0.77 +2.28%
Volume: 1.04M
Nov. 29, 2022 10:31a
P/E Ratio
4.24
Dividend Yield
5.80%
Market Cap
$67.90 billion
Rev. per Employee
$486,707
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/zigman2/quotes/200227697/realtime
US : U.S.: Nasdaq
$ 60.51
-1.19 -1.93%
Volume: 0.00
Nov. 28, 2022
loading...
/zigman2/quotes/202877789/composite
US : U.S.: NYSE
$ 49.57
-0.0050 -0.01%
Volume: 3.04M
Nov. 29, 2022 10:32a
P/E Ratio
9.54
Dividend Yield
3.23%
Market Cap
$278.25 billion
Rev. per Employee
$1.26M
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