Tax Loss Sale Candidates

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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.