Five Tax Loss Selling Candidates to Put in Your Shopping Bag This Holiday Season

By Michael Brush
December 20, 2005

We can’t let the year go by without applying our insider intelligence to a regular end-of-year activity for investors and traders alike: Picking up beaten down tax loss selling candidates on the cheap.

At the end of each year, many investors sell the year’s losers and “take losses” so they can match them up against gains and reduce their tax bills. This puts unusual downward pressure on stocks, pressure which may ease as the new year begins.

As usual when buying beaten down names, the trick is to avoid the notorious “value trap,” that is, the purchase of beaten down stocks that look cheap – but only stay cheap or get cheaper. How do we know which beaten down stocks from 2005 actually will come back?

We don’t.

But buying those which the insiders have been snapping up will definitely tilt the odds in our favor.

To find this season’s best tax loss selling candidates, I took two steps. First, I’ve scanned the smaller cap names to find stocks with some of the best insider buying profiles in recent weeks, according to my system. From that group, I selected the stocks whose charts look the ugliest for the year. A stock that’s now trading at or near its low for the year has the most shareholders underwater for the year. So they are more likely to be selling in the final days of the year to generate those tax losses.

Some of these names could begin to spring back right away in December once the tax loss selling pressure eases, and fresh 2006 retirement account money starts pouring into the market, looking for a home.

But as usual when following the insiders, it’s better to buy these instead with an eye for gains at some point in 2006 or 2007 – because insiders by nature tend to buy well ahead of the trends they think they see coming. In short, be patient with these names. But if you buy a group of them, the odds are good you’ll see a payoff that beats the market with ease over the next 18 months to two years.

Here’s this year’s crop of tax loss selling candidates.

GTX (GTXI) has fallen so hard this year, virtually anyone who purchased shares of this biotech company is now underwater. That’s a lot of potential sellers. But the buyers late this year include a director who purchased $744,000 worth of the stock in December. Directors also purchased over $10 million worth of stock back in October as part of a follow-on offering.

GTX is working on products that may prevent prostate cancer, treat the side effects of androgen deprivation therapy for advanced prostate cancer, and help with weight loss and muscle wasting associated with severe burns and cancer.

Chemtura Corporation (CEM), a specialty chemical company, saw its shares blow up in September when it announced poor results for the third quarter. The stock has rebounded from the lows it hit in October, but many people who bought this year are still looking at losses. Their selling is putting downward pressure on the stock right now. Insiders, however, have been actively buying in the $12 range – or near current levels.

Restoration Harware (RSTO) was a stock I featured here back on April 20 at just the right time (click here for article). Within three months this upscale home furnishings retailer had gained almost 50%. But now it’s back down to levels near where I first wrote about it, because of a slowdown in sales growth. Insiders, however, are buying again in a big way. One director, for example, has purchased about $4.8 million worth of the stock in the $5.40 to $6.50 range in the pull back. That’s a bullish signal if there ever was one. The retailer looks cheap again, with a
price to sales ratio of .42.

ActivCard (ACTI), which makes digital identity systems, has had such a tough year the stock is now trading down near its cash-per-share levels. How much lower can it go? After all, with $3.49 per share in cash, managers could close the company and hand over all the money to shareholders without causing them much damage – because the stock recently traded for $3.58. One insider recently plunked down $759,000 to buy 215,500 shares. The company is changing its name to ActivIdentity.

UTStarcom (UTSI), a major supplier of wireless and DSL equipment to Chinese telecommunications companies, has gotten pummeled this year. Shares have been slammed to $8.45 from $22. Around $8, a director bought nearly $400,000 worth of stock. The shares are cheap, at .33 times sales.

The bottom line: Buying these stocks now puts together two strategies that can give you an edge in the market: Picking up tax loss selling candidates and following the insider cues. I think all of these are buys right now for decent gains as a group in 2006 or beyond.

Disclaimer
At the time of publication, Michael Brush did not own or control shares in any of the companies listed in this column. Mr. Brush is an independent columnist for this web site. For more on Insiders Corner disclosure, see the disclosure section in About Insiders Corner: http://www.investorideas.com/insiderscorner/. InvestorIdeas.com Disclaimer: www.InvestorIdeas.com/About/Disclaimer.asp. InvestorIdeas is not affiliated or compensated by the companies mentioned in this article.