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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

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“Investors are acting like this is Texas in the 1980s all over again, and this bank will have a lot of bad loans,” says Eric Marshall, a portfolio manager at Texas-based Hodges Capital Management.

What the sellers are missing: Only about 8% of ViewPoint loans are to companies in the energy industry and about half of those don’t even produce oil. Many of them produce natural gas, which hasn’t fallen as much as oil. ViewPoint has lost about $200 million in market cap in the recent stock decline, and oil-related loans are only at $180 million. “So even if they all went bad, Wall Street has more than priced that in,” says Marshall.

Staying in finance, consider this bizarre oil-related disconnect in closed-end funds, which creates a great buying opportunity. Closed-end funds are like mutual funds in that they invest in stocks and debt. But, unlike mutual funds, they trade throughout the day.

Lots of closed-end funds invest in the debt of companies that have nothing to do with energy. But they are still getting crushed by fears that lower oil will force energy companies to default on debt.

“They’ve been obliterated,” says Maury Fertig, chief investment officer at Relative Value Partners, which regularly outperforms its benchmarks. That makes those funds a great buy now, says Fertig, a closed-end fund expert.

Here’s why those closed end funds are getting beaten down, unjustly. The worries about high-yield debt in energy has investors dumping high-yield mutual funds. To meet redemptions, “mangers are selling what they are able to sell,” says Fertig. That’s pushed down safer, non-energy debt and the closed-end funds that hold it.

The upshot: Many debt-oriented closed-end funds are near discounts not seen in almost 20 years, says Fertig. They’re getting hit by a double whammy — the energy panic and the tax-loss selling pressure that will soon be gone. “People come back in January and look at these things, and all of the sudden everything is rosy and everything looks attractive,” says Fertig.

One he favors: Blackstone/GSO Senior Floating Rate Term Fund /zigman2/quotes/203266357/composite BSL 0.00% , which trades at an 8% discount to its net asset value, which is the value of its underlying debt holdings. For context, the average discount over the past three years is zero. One advantage with this one is if you buy now, you’re virtually guaranteed that 8% because the fund is scheduled to redeem, or cash out, investors at net asset value in 2020. Meanwhile, this fund offers a yield of about 13.8%. Fertig also likes the BlackRock Floating Rate Income Strategies Fund /zigman2/quotes/204203198/composite FRA -0.99% and Eaton Vance Limited Duration Income Fund /zigman2/quotes/201497040/composite EVV -0.43% . Both also trade at steep discounts to NAV and offer attractive yields of 6% to 8%.

Finally, in energy, consider Eagle Materials /zigman2/quotes/207732987/composite EXP +0.69% , which supplies sand used in fracking, and cement used in finishing oil wells. “Eagle has taken a big hit because investors see it as heavily tied to energy,” says Marshall, at Hodges Capital Management. But Eagle also has a big presence in construction since it sells cement and gypsum wallboard, businesses that are going strong. “We think the business outlook is better than it was six months ago,” says Marshall.

Housing-related stocks

Housing stocks have also had a tough year. But housing is not down for the count. Housing should benefit as consumer confidence increases with employment gains next year even if rates go up a bit, because banks will be more eager to lend, says John Buckingham, a mutual fund manager who edits the “Prudent Speculator,” a stock newsletter with a great record. So beaten-down housing-related stocks already look interesting. Now they’re even cheaper, due to tax-loss selling. One that Buckingham favors is MDC Holdings /zigman2/quotes/203145113/composite MDC -2.18% . It has a solid balance sheet, and it pays a 4% yield.

Next, consider Encore Wire /zigman2/quotes/209890791/composite WIRE -1.43% , which sells copper wire used in construction. Its stock is suffering along with many of the rest of the housing-related stocks. But new plants help make Encore the low-cost provider in a sector that lost a lot of capacity during the downturn. Marshall, at Hodges Capital Management, thinks Encore could post $3 a share or more in earnings in a few years, compared with about $2 in 2014, possibly driving the stock to $50 for a 35% gain.

Finally, Genworth Financial /zigman2/quotes/204924015/composite GNW -1.41% looks like an attractive tax-loss-selling candidate, says George Putnam, who pens the “Turnaround Letter,” a stock letter with a solid long-term record.

Genworth has a durable mortgage-insurance business. But its stock is weak because it sold long-term-care insurance policies too cheaply, and it’s had to build reserves against that. “It looks like they are finally getting a handle on it,” says Putnam. “If they have gotten that under control and the mortgage-insurance business continues to pick up, the stock could move up a lot.”

At the time of publication, Michael Brush had no positions in any stocks mentioned in this column. Brush is a Manhattan-based financial writer who publishes the stock newsletter “Brush Up on Stocks.” Brush has covered business for the New York Times and The Economist group, and he attended Columbia Business School in the Knight-Bagehot program.

/zigman2/quotes/203266357/composite
US : U.S.: NYSE
$ 12.56
0.00 0.00%
Volume: 38,143
Sept. 30, 2022 4:10p
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/zigman2/quotes/204203198/composite
US : U.S.: NYSE
$ 11.01
-0.11 -0.99%
Volume: 268,013
Sept. 30, 2022 4:10p
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/zigman2/quotes/201497040/composite
US : U.S.: NYSE American
$ 9.21
-0.04 -0.43%
Volume: 329,335
Sept. 30, 2022 4:00p
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/zigman2/quotes/207732987/composite
US : U.S.: NYSE
$ 107.18
+0.73 +0.69%
Volume: 301,381
Sept. 30, 2022 4:00p
P/E Ratio
11.13
Dividend Yield
0.93%
Market Cap
$4.04 billion
Rev. per Employee
$885,063
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/zigman2/quotes/203145113/composite
US : U.S.: NYSE
$ 27.42
-0.61 -2.18%
Volume: 748,452
Sept. 30, 2022 4:00p
P/E Ratio
3.11
Dividend Yield
7.29%
Market Cap
$1.99 billion
Rev. per Employee
$2.63M
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/zigman2/quotes/209890791/composite
US : U.S.: Nasdaq
$ 115.54
-1.68 -1.43%
Volume: 280,969
Sept. 30, 2022 4:00p
P/E Ratio
3.39
Dividend Yield
0.07%
Market Cap
$2.21 billion
Rev. per Employee
$2.06M
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/zigman2/quotes/204924015/composite
US : U.S.: NYSE
$ 3.50
-0.05 -1.41%
Volume: 3.71M
Sept. 30, 2022 4:00p
P/E Ratio
2.23
Dividend Yield
N/A
Market Cap
$1.76 billion
Rev. per Employee
$3.03M
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Michael Brush is a Manhattan-based financial writer who publishes the stock newsletter Brush Up on Stocks. Brush has covered business for the New York Times and The Economist group. He attended Columbia Business School in the Knight-Bagehot program.

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