Tax Loss Sale Candidates

By admin_45 in Blog Tax Loss Sale Candidates

Buying the worst performing stocks late in a calendar year is a historically popular trading strategy for those who can stand to show the year’s biggest losers in their year-end portfolio. The basic idea behind this deeply contrarian approach:

Outsized losers tend to draw outsized tax-loss selling late in a calendar year.
Once the calendar turns to the next year, that selling abates.
This strategy is basically an amped-up “January effect” play. This well-researched market anomaly seems most closely tied to December tax-loss selling (especially in less liquid, small cap equities).
It is also similar to the “Dogs of the Dow” investment approach that owns the 10 highest yielding DJIA names. The idea here: these stocks tend to be laggards set to revert to a higher price/lower dividend yield.

For readers that want to apply this methodology to a sector-level portfolio, here are the 3 worst performing industries YTD in the S&P 500:

Materials: -15.2%
Energy: -14.1%
Financials: -13.2%

Worth noting: any bounce for these groups in the New Year will necessarily come from better investor confidence in the US economy. That seems a stretch to us, so we advise caution in applying the notion of a January effect to sector analysis.

As for individual names in the S&P 500, here is an abbreviated list (10 stocks) of the worst performing names in the index YTD:

General Electric (GE, $7.10): -59% YTD. Industrial company with well-publicized balance sheet issues. Even with this year’s declines, the company still has a $62 billion market cap (although that is only 0.28% of the S&P 500).
Mohawk Industries (MHK, $116.98): -58% YTD. Flooring manufacturer for residential and commercial applications, hurt by concerns over a waning economic cycle.
Newfield Exploration (NFX, $14.70): -53% YTD. Energy exploration and production company, dinged by recent declines in commodity prices.
Affiliated Managers Group (AMG, $95.51): -53% YTD. A financial services firm that makes investments in active investment managers across asset classes and geographic regions.
Invesco (IVZ, $16.95): -53% YTD. Another asset management company.
Western Digital (WDC, $38.78): -51% YTD. Technology company specializing in data storage hardware and solutions.
L Brands (LB, $30.83): -49 YTD. Mall based retailer, home to Victoria’s Secret, Bath & Body Works.
Alcoa (AA, $28.61): -47%. Aluminum supplier.
Unum Group (UNM, $29.69): -46% YTD. Workplace insurance (disability, life, accident, dental/vision, etc.) provider.
Brighthouse Financial (BHF, $31.93): -46% YTD. Insurance and annuity provider.
IPG Photonics (IPGP, $117.99): -45% YTD. Fiber laser manufacturer with end markets in materials processing, communication and medical applications.

Important: buying the year’s losers in December is a risky investment strategy – this list is merely a starting point for your own research. We’ve used this approach in past years and have found it productive but stomach churning. Sometimes it works over 2-4 weeks. Other times it takes 3 months. When US equities falter in Q1, it may not work at all.

More broadly, this list is worth watching in January 2019 as a “tell” about general market conditions. If 2018’s biggest losers can’t catch a break in January, just when they should be clear of tax loss selling, then US equities will likely be in trouble as well.