Tax-loss selling puts pressure on these stocks
Dec. 19, 2004. 10:17 AM
PAT MCKEOUGH
Revenue Canada lets investors deduct their capital losses from capital gains, which reduces the amount of tax payable. If your capital losses in 2004 are more than your gains in 2004, you can use them to offset any capital gains that you paid taxes on in any of the last three years.
Note — these rules apply only to investments held outside of registered plans like RRSPs and RRIFs. This year, the deadline for tax-loss selling for stocks that trade on the Toronto Stock Exchange is December 24. Weak stocks tend to fall further as the deadline approaches, so you're better off selling any shares earlier instead of later. Remember, wait at least 30 days before buying the same stock again or Revenue Canada will deny your claim.
We feel investors should look carefully at each stock they're thinking of selling, particularly for bad reasons like locking in tax-losses. They'll often sell good investments at a low price, only to watch them rebound in the new year. Here are some out-of-favour stocks that may face tax-selling pressure, then roar back to life in the new year.
CAE Inc. (TSX: CAE) has dropped about 30 per cent since the start of the year, as airlines continue to cut costs. But airlines are ordering more aircraft and hiring more pilots, hich should spur demand for CAE's flight simulators and pilot training services. Revenues at CAE's military division are also rising.
CAE just agreed to sell its marine control business, which makes electronic navigation equipment for ships. The company plans to use the cash from the sale to cut its long-term debt, from 0.7 times equity to roughly 0.3 times. The stock trades at 15.3 times the $0.31 a share it should make in its current fiscal year, which is cheap considering CAE still spends about 9 per cent of its revenue on research. The $0.12 dividend yields 2.5 per cent.
CAE is a buy.
CP Ships (TSX: TEU) is still suffering from last summer's accounting problems that forced it to restate its financial results back to 2002. A new electronic accounting program uncovered several problems, particularly at some of its overseas operations. The old system required management to estimate many costs. The new system determined that these estimates were too low. The restatement reduced CP Ships' profits in the nine previous quarters by 30 per cent. However, the new system will give the company's managers more accurate information, which should help them take better advantage of the steady rise in worldwide trade.
The stock now trades at just 8.9 times its likely 2004 profits of $1.50 U.S. a share. The $0.16 U.S. dividend yields 1.2 per cent.
CP Ships is a buy for aggressive investors.
Gennum Corp. (TSX: GND) has drifted in the last few months, mainly due to growing losses at its hearing aid division, which supplies a third of its revenue. Gennum's hearing aid business should rebound as it launches new products based on digital chips instead of analog ones. Digital hearing aids sound better and last longer than analog models. The company is also adapting this technology for other devices besides hearing aids. For example, it's now selling a new digital signal-processing chip for wireless phones that filters out background noise, but does not impair the voice of the user. That makes it easier to use wireless phones in noisy environments like city streets and airports.
Gennum trades for 34.1 times the $0.41 a share that it will probably make in the fiscal year ended November 30, 2004. But Gennum is much more profitable than that when you consider that it spends 30 per cent of its revenue on research. The $0.12 dividend yields 0.9 per cent.
Gennum is a buy for aggressive investors.
Shawcor Ltd. $12 (TSX: SCL.SV.A) has dropped by a third in 2004, mostly due to losses at its pipecoating facility in Mobile, Alabama. Many of the plant's overseas customers are turning to pipecoating suppliers in their home countries. Projects are also becoming more complex, which increases ShawCor's costs and risk, and makes it more difficult for the company to offer its customers a competitive price.
ShawCor will probably make just $0.18 a share in 2004 (excluding a one-time charge of $1.09 a share for the Mobile plant), and the stock now trades at 66.7 times that figure. However, profits should climb to $0.65 a share in 2005, and the stock trades at a more reasonable 18.5 times that amount. The $0.08 dividend yields 0.7 per cent.
ShawCor is still a buy for aggressive investors.
Versacold Income Fund (TSX: ICE.UN) started to fall in September due to fears that a weaker-than-forecast vegetable harvest in the U.S. Midwest would cut revenue and profits at its new public refrigeration facilities in Wisconsin. Higher electricity costs have also cut into its cash flow and profits.
It's unlikely that a temporary drop in volume would force Versacold to cut its current distribution rate of $0.93 a unit, which implies a yield of 10.3 per cent.
It also has plenty of credit available to it to maintain the rate. The fund will probably earn $0.50 a unit in 2004, and the units now trade at 18.1 times that figure.
Versacold is a buy for aggressive investors.
Portfolio manager Patrick McKeough publishes The Successful Investor newsletter and is author of Riding the Bull: How You Can Profit in the 1990s Stock Market Boom. He or his clients may hold positions in stocks mentioned. His column appears Mondays. |
