'Tis the Season for Tax-Loss Plays

This column was originally published on RealMoney on Dec. 15 at 11:42 a.m. EST. It's being republished as a bonus for TheStreet.com readers.

Take a look at the calendar -- with just two weeks left in the year, it's time to get ready to profit from a well-documented seasonal effect.

Let's pick out weak stocks for January tax-loss plays.

Stocks that underperform grossly during the year are held back in the fourth quarter as investors sell them to reduce their capital gains taxes.

This burden is lifted when the new year begins, and many of these issues jump higher for a few weeks.

This classic strategy has been underplayed in recent years because big money has pushed the well-known January Effect into the November election period.

But this particular trade still aligns well with the calendar because it's locked into a specific tax year.

Be careful about which dogs you chose to chase. Avoid issues in which downward momentum is still strong as the fourth quarter comes to an end.

Disgruntled investors have bigger problems than tax relief with these falling knives, and they will still be dumping them well into January and February.

Look for price charts where stocks bottomed out a number of months ago but haven't risen off well-established basing patterns. These issues often turn into January's biggest winners.

There's a hit-or-miss quality to tax-selling plays, so the best approach is to scoop up a basket of weak stocks.

Decide how much total exposure you want to carry, and build a share profile that matches your wallet -- and stomach. Then sit back and set Jan. 20 as your selling date.

Here are five of 2005's most beaten-down stocks:

Dana(DCN Quote) is the worst performer in the S&P 500. It printed an all-time low two months ago when it plummeted to $5.50. Since then, it's seen buying interest. This makes it an excellent candidate for a January recovery.

Worried about its relationship to bankruptcy candidate General Motors(GM Quote)? Remember, you're just renting this stock for a few weeks, not buying into its long-term prospects.

Avon Products(AVP Quote) rallied hard in 2004 on speculation it would sell a lot of cosmetics in China. That move fizzled out and the stock has been grinding steadily lower most of this year. It fell into the lower $20s last month and completed a possible double-bottom reversal. The basing pattern since that time also suggests this will be a good recovery play.

Hard times have fallen on the print media as the Internet has crimped demand for tree-killing newspapers. This trend is reflected clearly in the 17-month downtrend on the chart of the New York Times (NYT Quote). The stock jumped off a multiyear low just six days ago on high volume. This establishes a logical place for traders to place stop-losses in case January doesn't give out its annual gifts.

UST (UST Quote), a producer of chewing tobacco and wine, has lost 25% of its value in the last nine months. The stock jumped off a 52-week low last week after an endorsement from James Cramer on Mad Money. That quick rally should establish a short-term bottom and set a January recovery into motion.

It's been a very bad year for Solectron(SLR Quote). The stock has been cut in half since hitting a December 2004 high at $6.69. The good news is that it hasn't printed a new low in the last nine months. This makes it an excellent candidate for a January recovery. But the upside here isn't more than 60 to 80 cents, so interested traders need to hit this one with a larger buy order than normal.

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