STREET SENSE: The fundamentals of stock market investing
Why Stock Pros Love December
As year-end tax selling subsides on stocks that are down, savvy investors can step forward and snap up bargains.

I've long believed that December is the most interesting month to be a stock investor. It's really the month that separates the pros who do their homework from the amateurs who just get carried along with the tide.

December is a month of opportunity because the end of December marks the end of tax-loss selling season. As you probably know, you can sell your losing stocks right up until the close of trading on Dec. 31 to either offset stock profits taken in the same year, or to take a tax loss of up to $3,000 that can offset an equal amount of ordinary income.

Because stock losses are a convenient way to reduce taxes, many investors will just unload their losing positions late in the year to gain a tax benefit, unaware that they may not be receiving good value for the stocks they're selling.

ILLUSTRATION: PHIL HOWE

BUYERS ARE LURKING

Meanwhile, sharp investors hover over the market like vultures throughout December, ready to pounce on attractive stocks that have been unduly pummeled by tax selling. Here, we'll discuss the art of hunting for year-end stock bargains.

You may have heard of a phenomenon called the "Santa Claus Rally." This is a market rally that traditionally occurs in the trading days between Christmas and the end of the first week of January. The spark for this rally is actually the end of tax-selling season and the bargain hunting that kicks in around that time.

This December, there are literally thousands of beaten-down stocks to choose from if you're looking for a bargain. There are hundreds in the technology sector alone. Also near their lows are numerous industrial, energy, transportation, leisure-related, retail, hotel and media companies. It's fair to say that the bargain basement is more crowded this year than it's been since December of 1987. In that year, a major October crash led to an increase in tax-loss selling that lasted through the end of the year.

It's interesting to note that those who bought stocks in December of 1987 generally did very well for themselves when stocks rebounded strongly during the following years.

REFINE YOUR SELECTION PROCESS

You can't just pick any stock that's way off its high and buy it in late December. Many of the stocks now scraping bottom, especially in the technology sector, will never recover.

Start your selection process by looking for companies with clean balance sheets -- companies that have cash and little or no debt. These financially strong companies are better able to deal with lean times than are debt-laden companies that are saddled with making regular interest payments to their creditors.

In addition to checking out balance sheets, look for industry leaders. In a business downturn, the leaders are the first to bounce back when the economy strengthens. There's no point sifting through the technology sector to find some unknown company. In reality, it will be the Intels, IBMs, Ciscos and Sun Microsystems of the world that will lead any recovery in the tech sector.

HAVE A KEEN EYE FOR BARGAINS

We all love a bargain, whether the sale is in a retail store or on Wall Street. Just make certain that the bargain stocks you buy in December truly represent quality. The key to successful investing is buying good stocks cheaply.

Ophthalmology Management Associate Editor Jerry Helzner has written more than 50 articles on stock investing for Barron's. He has been a regular stock market columnist for other business publications and was a member of the equity research department of a major regional brokerage firm.