Let the Dumpster Diving for Stocks Begin

NEW YORK (TheStreet) -- It's time to begin the harvest: the tax-loss harvest, that is. By selling the losers, investors can reduce taxes by offsetting gains in what has been a stellar year for the markets.

It looks to be a big year for capital gains -- look no further than the world of mutual funds. For example, a couple of the Janus Funds, Janus Twenty (JNTFX) and Janus Venture (JAVTX), have announced preliminary year-end distributions in excess of 20% of the funds' net asset value. Ouch!

Long-term capital gains rates will be significantly higher this year for some taxpayers -- up to 23.8%, if you include the new Medicare surcharge for high-income taxpayers. So the pressure will be on over the next two weeks to dump what needs to be dumped. Of course, this may create some opportunities. Selling the companies that are down for the year will put even more pressure on their prices. So I, and many other value-oriented "dumpster divers," will be on the lookout between now and early January for the bargains that have been so elusive in the past year.

I am searching on a couple of fronts. First, I want quality companies with margins or assets that are down more than 10% over the past year. Wood products and timber name Rayonier (RYN) looks interesting. The stock is down about 17% year to date. Much of the damage came from a 20% one-day haircut after the company reported very disappointing third-quarter results. It was an ugly quarter. But with a 4.4% dividend yield and assets that include 2.1 million acres of land, this is a quality company that might get a bit cheaper.

RYN Chart
RYN
data by YCharts


Retailers are not typically my cup of tea but American Eagle Outfitters (AEO) is another potential candidate. Shares are down 28% year to date. That may get worse before the year is over. The balance sheet is in good shape, with about $357 million in cash and no debt, and the stock currently yields 3.1%. It would be nice to see this one fall further before year-end, to see investors pile out in droves to create a real bargain basement price. The stock's profits are tied to fashion and the whims of 15- to 25-year-old consumers.  That demands a big margin of safety.

AEO Chart
AEO
data by YCharts

Second, I look for ugly, down and out situations in which companies have made major missteps or have hit the ropes. This is much more speculative in nature. Premier Exhibitions (PRXI) runs touring exhibitions but, more important, owns more than 5,500 artifacts that it salvaged from the Titanic wreck site.

Shares are down 55% year to date. The company has been unable to follow through on the sale of the artifacts, which were appraised at $189 million several years back. Premier must sell the artifacts as a single collection due to a court decision that awarded title to them. The company tried to auction off the collection in 2012, with the winning bidder to be announced on the 100th anniversary of the Titanic sinking. The auction failed. As the company has continued attempts to find a home for the collection, the stock has sunk further.

There is a huge disconnect between the company's current market cap and the assumed value of the Titanic collection. This is the epitome of the value investor's dilemma: extremely valuable assets that must be sold for that value to be realized.

PRXI Chart
PRXI
data by YCharts


I am also keeping an eye on toy company JAKKS Pacific (JAKK), which has had a horrendous year. The  stock has fallen 40% and the operating results have been dreadful. Just a couple years back, this company had a buyout offer from Oaktree Capital for $20 a share, which it rejected. The stock, now at just over  $6, trades below book value. The consensus sees a return to profitability by next year.

JAKK Chart

JAKK data by YCharts

Happy harvesting and happy dumpster diving!

At the time of publication, the author was long Premier Exhibitions.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Jonathan Heller, CFA,CFP® is president of KEJ Financial Advisors, his fee-only financial planning company. Jon spent 17 years at Bloomberg Financial Markets in various roles, from 1989 until 2005. He ran Bloomberg's Equity Fundamental Research Department from 1994 until 1998, when he assumed responsibility for Bloomberg's Equity Data Research Department. In 2001, he joined Bloomberg's Publishing group as senior markets editor and writer for Bloomberg Personal Finance Magazine, and an associate editor and contributor for Bloomberg Markets Magazine. In 2005, he joined SEI Investments as director of investment communications within SEI's Investment Management Unit.

Jon is also the founder of the Cheap Stocks Web site, a site dedicated to deep-value investing. He has an undergraduate degree from Grove City College and an MBA from Rider University, where he has also served on the adjunct faculty; he is also a CFA charter holder.

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