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Get bullish on beat-up stocks: McDonald

Wednesday, 27 Nov 2013 | 1:28 PM ET
Bullish on beat up stocks
Wednesday, 27 Nov 2013 | 12:06 PM ET
Larry McDonald, Newedge senior director, discusses what lagging stocks are worth a buy. McDonald explains why when the credit outperforms the equity it's a great sign.

Year-end selling of underperforming stocks makes for plenty of opportunity for the following year, Larry McDonald of NewEdge said Wednesday.

"We look for stressed sectors toward year end, especially with the S&P up 26, 27 percent," he said. "People in December have to sell their losers. They have to sell them."

On CNBC's "Halftime Report," NewEdge's senior director and U.S. credit, equity and policy strategist said that Bank of America stock had taken a beating toward the end of 2011, only to climb 100 percent in 2012.

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"At the end of last year, First Solar, Best Buy and Hewlett-Packard were all dogs in December, and they're up 50, 60 percent in the first half of this year," he said.

For next year, McDonald said, the home builders looked to have strong potential.

"They've underperformed in the last six months. Credit is outperforming the equity in the case of Hovnanian. That's a very positive sign," he said. "But the gold miners and the coal stocks are the dogs."

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Underperforming stocks in the mining sector include Newmont, Cliffs Natural Resources and Peabody.

"There's only 40 names in the S&P that are negative this year," McDonald said. "I mean, it's just insane."

McDonald holds long positions in Best Buy, First Solar and Hewlett-Packard.

Josh Brown of Ritholtz Wealth Management called it an "interesting strategy," urging a bias toward quality.

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"There are a lot of really bad business models, and there's a ton of leverage, so I think you really want to go for the quality version," he said. "So, if you're going to say gold miners, I would err toward the larger, better balance sheets if I were to make that play."

By CNBC's Bruno J. Navarro. Follow him on Twitter @Bruno_J_Navarro.

Trader disclosure: On Nov. 27, 2013, the following stocks and commodities mentioned or intended to be mentioned on CNBC's "Fast Money" were owned by the "Fast Money" traders: Stephen Weiss is long BAC, C, GS, MS, M, GILD, AIG and long calls AMZN; Jon Najarian is long AAPL, BAC, C, GS, JPM, GLD, MSFT, HPQ, AXP, NHI, TSO, CROX, UPS, BYD, VLO, HFC; Josh Brown is long AAPL, BAC, F, DDD, XLF; Simon Baker is long AAPL, C, CSCO, FB, AMZN, HD, FDX, VIAB, DIS, GM, HTZ; Larry McDonald is long BBY, FSLR, HPQ.

  Price   Change %Change
S&P 500
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BAC
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FSLR
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BBY
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HPQ
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HOV
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NEM
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CLF
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BTU
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