How 'Window Dressing' Can Hide the Losers (original) (raw)

By selling out of big losers prior to the quarter's close, portfolio managers can hide the stocks from clients, but some downtrodden shares could be ripe for bounces next week, so here's my list.

What is "window dressing" as it relates to investing?

Friday marks the last trading day of 2019's first half. Portfolio managers hate, hate, hate showing big losers in the end-of-period holdings in any quarter, or half's, final report. That is true no matter how cheap these stock are, or how likely they might be to rebound strongly.

Mutual fund holders or institutional clients seeing "dogs" on an end of quarter report ask unsettling questions about why you owned such a bad performer.

What's the easiest way to avoid that embarrassment? Simply selling out of big losers prior to the quarter's close can make them disappear from view, even though the damage remains.

Portfolio managers who still believe in the companies' prospects can then quietly buy back during the following week. Then, sharp rebounds from depressed starting points, show on the next end of quarter statement as large gains. Owners of the fund, exchange-traded fund or managed account then think the manager must be a genius for picking up shares on the cheap.

Shares which are down near the end of quarters tend to get pushed down even more as they're jettisoned from portfolios. Stocks that performed well are often purchased again using "market at close" orders.

Why would fund managers want to buy right at 4 p.m., at market? Sending shares upwards by buying as the period closes revalues the entire position at an artificially high price. A relatively small new commitment can help inflate a much larger holding. That helps the fund or ETF look better when performance figures are released.

Huge money can be made or lost based on end-of-quarter results. Bonuses for out-performance and net-money-flow into, or out of, funds is often tied to numbers which can be legally manipulated using these techniques.

What does this mean for you on this last trading day of the first half of the year? If you're holding big winners you may get a great chance to sell them at great prices near today's close. In tax-sheltered accounts, you could book good gains and try to buy back next week, at lower prices, even if you still like the stock's prospects.

Conversely, many beaten-up stocks might sell off further this afternoon, for no other reason than window dressing. Buying big losers just before quarters' end is a great way to secure bargain pricing, which might just reverse on the very next trading day.

Here are some downtrodden shares which might be ripe for good bounces next week:

Affiliated Managers Group (AMG)

Cognizant Technologies Solutions (CTSH)

CVS Health (CVS)

FedEx (FDX)

Greif (GEF)

3M (MMM)

MSC Industrial (MSM)

Signet Jewelers (SIG)

Tapestry (TPR)

Tupperware Brands (TUP)

United Natural foods (UNFI)

Walgreens Boots Alliance (WBA)

CVS is a holding in Jim Cramer's Action Alerts PLUS member club.

At the time of publication, Paul Price was long on AMG, CTSH, CVS, FDX, GEF, MSM, SIG, TPR, TUP, UNFI, WBA, with short puts on AMG, CTSH, CVS, FDX, MSM, TUP, UNFI, and WBA.