Underappreciated Stocks

I have always been a sucker for end-of-the-year specials, which are those doggy stocks that have done so poorly — arf! arf! — that investors sell them around this time of year to take their losses and be done with them. Investors use those losses to cancel out gains they may have taken during the year on other stocks (and, if their losses exceed their gains, up to $3,000 in ordinary income, with any extra carried forward).

This is called tax-selling.

It can lead to some rational irrational behavior. Say you paid $29 for a stock that’s now $6 but worth $9. Selling at $6 to take the loss could save you so much in taxes it makes sense to sell.

So it can be rational to sell for $6 something worth $9.

But to the rest of us, a stock worth $9 that’s selling for $6 represents a bargain.

And it can become more of a bargain when disgusted tax-sellers, instructing their brokers to sell before year-end, regardless of the price, drive it down under $5, say — at which point many brokerages will no longer count it as “marginable,” making it harder for some customers to buy and putting pressure on some who already own it to sell. So now you may have tax-selling pressure and margin pressure and the stock is $3. Which makes more miserable owners see it as a tax-selling candidate — including those who paid “just” $6 for it — and they sell, too. So now the stock is two.

Of course, what often happens with these dogs is that they’re not worth $9 after all, or even $2 — they’re worth zero, and ultimately attain it.

Still, for the scavengers among you, and for those constantly urging me to suggest something more thrilling than an index fund or Treasury Direct . . . some way that you, too, can have horrible losses like mine to complain about at cocktail parties . . . I am tempted to tell you about a couple of dogs.

I am tempted . . . but I won’t do it, lest (a) you buy them, drive their prices up, and leave me open to accusations of trying to hype stocks I own; or (b) you buy them, they go to zero, and you hate me.

I know you say you won’t hate me, but you would hate me. I would hate me, too.

So you will have to find your own dogs, take your own gambles, and watch as many of them really do go to zero. The fun is when you have one that bounces back.

This used to be part of what was called “The January Effect.” In January, tax-selling pressure would end and quite a few people would reestablish their positions in those dogs, bidding their prices back up. (Tax-sellers have to wait 31 days before buying back their shares for the tax-loss to be valid.) Not to mention all the new IRA and Keogh money that can now be tossed into the market for a new year, and the flood of year-end bonus money.

Once The January Effect became famous, long ago, some people began selling their dogs earlier, buying back their shares in December rather than January, in anticipation of the snap-back. So that muddied the January effect a bit. It’s not the sure thing it once was; and in truth it never was a sure thing, just a little odds-tilter.

A bad surprise around Y2K — which few including me now expect (which is why it would be a bad surprise) — could muddy this January further.

But — for all the impossible-to-value wild high-fliers out there — I expect there are quite a few old-fashioned underappreciated stocks to be had as well, beaten down by bad news exaggerated by tax-selling.

If you have some speculative funds and enjoy this kind of thing, go look for some.

Or wait — here’s a way it might work to use actual names! The following six stocks are pretty doggy. But two of them I am short, meaning I hope (and believe) they have further to fall. Two of them I am long, meaning I hope (and pray) they will bounce back. And two of them I do not have an interest in either way.

I won’t tell you which are which, lest I be accused to promoting my positions or wind up with you hating me.

But they sure are doggy stocks! Clayton Homes (CMH), U.S. Floral (ROSI), Iomega (IOM), Criimi Mae (CMM), CompUSA (CPU) and Ultralife Batteries (ULBI). Remember: I am NOT recommending you buy or short any of these. If you do look into one and decide it’s going lower and it does — more power to you. I hope it’s one of the two I’m short. And if you decide another is going higher and it does — more power to you for that, too. I hope it’s one of the two I’m long. As for the two I have no interest in either way, I hope — well, what do I hope? I guess I hope they just prove very boring.

Shorting stocks is a very bad life choice for almost everybody; and buying doggy stocks is almost as risky. So this is more for fun than anything else. In fact, if you want to play the game without losing any actual money (oh, if they had only offered this option to me when I was your age!), do this:

Send me an e-mail at myvastfortune@aol.com (not my regular account, please!) that looks like this (feel free to cut-and-paste):

I WOULD GUESS

You own these two stocks: [XXX, XXX]

You’re short these two: [XXX, XXX]

You have no position in these two: [XXX, XXX]

I think these (if any) will be significantly higher in six months or a year: [ . . . . . ]

And these (if any) will be significantly lower: [ . . . . . ]

Indeed, set up a hypothetical portfolio on one of the Internet services and “invest” $100,000 any way you want in some or all these symbols. (E.g., if you short $20,000 worth of one of them, that would leave you with $80,000 to go long one or more of the rest.) Include these allocations in your e-mail.

We can then check in six months or a year to see how smart you were, and how smart you were in figuring out how dumb I am. (You’ll be the one reporting in with your vast success; but I’ll have a copy at myvastfortune@aol.com just to make sure no one is tempted to exaggerate.)

There may even be a prize.

And by doing it hypothetically this way, I will be the only one who loses real, actual money.

With your real, actual money — and only the portion you will NOT need in the next few years, and that you feel comfortable committing to the stock market — either buy index funds, or do a lot of real, actual homework.

Tomorrow: A Stock That’s Surely Going to Zero