We were at a cannabis conference today hosted by the sponsors of the THCX ETF and got to talking about tax loss selling with an investment advisor who works at a very large NYC firm. As Jessica recently mentioned, this hard hit sector is seeing its share of year-end pressure from investors dumping the group after its very disappointing year.
“Yeah… we’re not quite done. Friday, probably… We should be done by then” was his reply to our question as to whether he had sold everything he wanted to. He also mentioned that 2019 was much calmer on the tax selling front than last year, when December’s sudden swoon into negative territory for the major US equity indices forced managers to scramble for tax losses to offset gains taken early in the year.
Which brings us to something of an annual ritual here at DataTrek: listing the year’s worst performing names in the S&P 500. We first saw this strategy in action at SAC in the early 2000s. The idea is to cull through big losers in December, pick up a few names that one likes on fundamentals/valuation and wait for the tax loss selling to abate in January.
Using a -25% year-to-date return as our cutoff, here are this year’s names (randomized) and their respective YTD losses:
- The Gap (GPS): -31.2%
- Mosaic (MOS): -28.6%
- Occidental Petroleum (OXY): -37.0%
- Kraft Heinz (KHC): -26.2%
- Trip Advisor (TRIP): -44.6%
- Mylan (MYL): -31.3%
- Macerich (MAC): -38.6%
- Abiomed (ABMD): -45.5%
- Alliance Data Systems (ADS): -26.4%
- L Brands (LB): -27.9%
- Macy’s (M): -44.5%
A few points on this:
- As with our tax loss sale lists in prior years, our only purpose is to give you a starting point for further analysis. We do not make stock recommendations at DataTrek.
- It usually takes several weeks once the calendar has turned before tax loss sale stocks start to work. We’ve seen it take anywhere from a few weeks (the classic “January Effect” is partly tied to tax loss selling, after all) to 2-3 months and occasionally this approach fails to generate any alpha at all.
- Since this strategy requires showing the year’s worst performers in a portfolio on December 31st, it is obviously not for the faint of heart.
Summing up: we’ll track this basket in early 2020 to see how these names play out, so stay tuned. As Jessica pointed out when she reviewed tax loss selling in legal cannabis plays, if a big loser fails to lift in January it likely signals real trouble for the company in question. The same goes for the list above, which features some widely watched stocks like Gap, Macy’s, and L Brands.