I sold off my losers to reap the tax benefit, then realized that a lot of other investors are likely doing the same. Not only is this time of year a great time to sell, but it’s also a great time to buy stocks that have dropped, and that may be dropping more. Some of my year-end picks:
Coach, Inc. (COH): Coach is one of those faux luxury brands that got a little carried away itself. At first these brands understand design and exclusivity. Then someone in a corner office without enough to do comes up with the bright idea to put Coach bags in every possible place. They are no longer exclusive, no longer cool. Sales rise temporarily until consumers catch on. But with a new designer and new executive team, Coach might just turn around.
As of now, Coach is down 33% over the past year. The yield is a nice 3.5%. On the minus side, fashion trends are tricky and could sink this stock further in the coming year. But this is a nice contrary value play with a great brand.
Chicago Bridge & Iron Company (CBI): I’m a lazy man, and it’s nice when others with a great reputation have researched a stock for you. When a renowned value investor (Warren Buffett) owns a stock, I like to look into it. And CBI is down a whopping 47% over the past year, which might seem risky to folks out there who chase momentum. But in a market that keeps reaching record highs, I constantly fear the big drop. So I look for places in the market that seem a bit less frothy, and a stock that’s lost half it’s value is definitely one of those places.
At $4.7 billion in market cap, CBI has returned between $40-$100 million in stock repurchases, $30-$80 million in dividends and has grown it’s equity by $1.7 billion over the last 5 years. That’s returning almost 10% per year back to shareholders in some tangible way. And fishing in the same pond as Buffett can’t be a bad move. Some of his stocks have posted some big losses this year (IBM, GM, CBI), but those losers might offer some protection from any coming correction.
Honda Motor Company (HMC): Most auto stocks seem fairly undervalued at the moment, but Honda is down almost 29% over the past year. This is a great company with a long history of returning money to shareholders. Even with it’s recent airbag troubles, I can’t shake the image of Honda as a builder of high-quality cars.
Petrobas (PBR): This is where things get interesting. Petrobas is down almost 46% over the past year, and offers an extremely attractive valuation by any metric. Unfortunately they really don’t pass the sniff test. Management is embroiled in a corruption scandal. Lawyers are busy filing class action lawsuits on behalf of shareholders. While it’s hard to believe that Brazil would let their national champion go under, they sure haven’t flinched at letting share prices drop over the past 5 years. Add in a government unfriendly to capitalism, and there’s just too much risk to buy this stock.
On the other hand, at such a great valuation, instead of putting up the cash to go long, I think Petrobas is an interesting speculative bet. Some unknown future action could quickly restore confidence that the company will continue and be able to return cash to shareholders. By buying some call options (strike price $8 expiring January 2017 @ price $2.15), I’m able to take advantage of big positive moves in the stock while limiting any risk. If you take the below scenarios:
| Price | % Chance | Profit | Weighted Profit |
| $2 | 10% | ($215) | ($21.50) |
| $4 | 15% | ($215) | ($32.25) |
| $8 | 50% | ($215) | ($107.50) |
| $20 | 15% | $1,200 | $180.00 |
| $40 | 10% | $3,200 | $320.00 |
Most likely you would lose $215 by buying 100 contracts. But by weighting the probability of each outcome (take with a grain of salt), the “probable” profit is $338.75. It’s not “likely”, but it’s a somewhat-more educated bet.
DISCLOSURE: At end of year I have gone long on COH, CBI & HMC, and I have bought call options on PBR.
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