Individual Investor end of year bargain article.Tax Loss Selling Bargain Bin TODAY
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Senior Analyst: Adam Lowensteiner (12/20/99)
Hey Investors! It?s that time of year again!
No. Not for writing letters to Santa and making a fool of yourself in front of your co-workers at the office holiday bash.
Like this Article?
We?re talking about tax loss selling.
All right, so it?s not nearly as much fun as quaffing 90-proof egg nog, but this is a financial Web site.
Every December, investors bail out of their losers, allowing them to offset against any capital gains that may show up on the tax bill come April 15. Also, investors will wait until the last possible moment to dump shares, making December a popular month for selling.
The idea is to turn around and buy shares of a similar company so you can participate in a rally if the sector rebounds.
Remember: The IRS requires investors to wait 30 days before repurchasing an investment you sold, otherwise you?d be in violation of the Wash Sale Rule. Translation: The IRS deems that you never sold the investment in the first place.
Investors can probably already see the 1999 losers that are still taking it on the chin, even though the markets continue to be strong. Tax loss selling is also rampant among those stocks that have no foreseeable catalyst to push the shares higher.
A prime example is First Union (NYSE: FTU - Quotes, News, Boards), which was an Individual Investor Magic 25 Pick for 1999, and, sad to say, one of the few real duds in the group. Fortunately, the Magic 25 portfolio as a whole was up 79.3% for the year.
Bank stocks spent much of the year in the doghouse thanks to interest rate and Y2K concerns. But First Union added to its problems by reporting lower earnings compared to 1998 because of a poorly executed integration of some recent acquisitions.
More fuel was added to the fire when First Union management told analysts to lower earnings estimates for next year. Shares of First Union have slipped since that news and will likely continue to fall the remainder of the year.
Methinks chief executive Ed Crutchfield winds up on Santa?s naughty list this year and finds coal in his stocking when he wakes up on Christmas morning.
But sometimes investors can make a few bucks on stocks that lose value because of tax loss selling. Some issues will inevitably fall in December because of tax loss selling pressure, but after the New Year, the annual January effect kicks in, propping shares back to a normal valuation.
There are thousands of stocks out there that will experience some level of tax loss selling, but the fundamentals remain strong, making them even more compelling now. Below are a few sectors that have been suffering because of year-end selling, but could be attractive going forward, either as a short-term trade or a long-term investment.
Internet Stocks
Some of the names here include Etoys (NASDAQ: ETYS - Quotes, News, Boards), ExciteAtHome(NASDAQ: ATHM), Priceline.com (NASDAQ: PCLN - Quotes, News, Boards), TicketmasterOnline CitySearch (NASDAQ: TMCS - Quotes, News, Boards) and High Speed Access (NASDAQ: HSAC - Quotes, News, Boards).
Etoys has been really experiencing some tax loss selling, as the stock continues its slide from a high of $86 a share. It closed Friday at $37.56.
There?s yet to be any evidence that the competitive threat posed by toysrus.com has inflicted any real significant ham on Etoys this holiday season. Once shareholders reassure themselves that the business model is sound, the shares could easily pop in January.
Another play here is ExciteAtHome, which has been signing up deals with companies like Microsoft (NASDAQ: MSFT - Quotes, News, Boards) and Sega (OTC: SEGNY - Quotes, News, Boards).
Technology Stocks
Here investors can likely find short-term trades as well as attractive long-term plays, which would include IBM (NYSE: IBM - Quotes, News, Boards), Unisys (NYSE: UIS - Quotes, News, Boards), Xerox (NYSE: XRX - Quotes, News, Boards), Compaq Computer (NYSE: CPQ - Quotes, News, Boards), Newbridge Networks (NYSE: NN - Quotes, News, Boards), Hewlett-Packard (NYSE: HWP - Quotes, News, Boards) and Informix (NASDAQ: IFMX - Quotes, News, Boards).
Of these stocks, the classic short-term trade is to watch Xerox or Unisys, as these stocks don't have the best long-term outlook, but have been suffering from bad news, and could slip lower with tax loss selling.
The other technology names listed could participate in a market rally, and are better for long-term investors. Stocks like IBM, Hewlett Packard and Informix have staying power, despite recent news that has investors putting selling pressure on these stocks.
Bank and Financial Stocks
This area can be subdivided three ways: commercial banks, online brokers and insurance. The stock market is going to need bank stocks to recover if there is going to be a broad-based recovery in share prices.
If the banks don?t begin to rally, it shows that a fear of interest rate hikes is still weighing down shares.
First Union and Bank One (NYSE: ONE - Quotes, News, Boards) will face heavy year-end selling, especially after pre-announcing poor outlooks for next year. They could pop in January once tax loss selling has ceased.
Another catalyst could be resurgence in bank takeovers, which have been almost non-existent this year because of the Y2K fear.
Online brokers have been profitable and posting earnings surprises but have caused the Street to yawn. Some of the 'dead' stocks here are Ameritrade (NASDAQ: AMTD - Quotes, News, Boards), TD Waterhouse (NYSE: TWE - Quotes, News, Boards), and DLJ Direct (NYSE: DIR - Quotes, News, Boards).
Of the insurance companies, there are loads of 'buys,' including Allstate (NYSE: ALL - Quotes, News, Boards), Aetna (NYSE: AET - Quotes, News, Boards), and Conseco (NYSE: CNC - Quotes, News, Boards).
Retail Stocks
Of those retailers, I dug up this list: Barnes & Noble (NYSE: BKS - Quotes, News, Boards), Abercrombie & Fitch (NYSE: ANF - Quotes, News, Boards) and J.C. Penney (NYSE: JCP - Quotes, News, Boards).
Penney recently slashed its dividend in half, but with the new payout it is still posting a 6% yield. Also, the stores are the meat and potatoes with Penney, but its Web site (jcpenney.com) has been ranked among the top 40, according to PaineWebber, and the company could spin-out its Eckerd drug stores, which have been experiencing double digit comparable stores sales.
Barnes & Noble could get a bounce, especially as it reports its seasonally strongest quarter in February. Abercrombie might get a lift, depending upon December same-store sales, but the fad might be fading, at least on the Street.
Miscellaneous Stocks
In addition to the groups listed above, there are other stocks that could be experiencing some tax selling. If the markets explode in January, it is a good hunch that these stocks will participate in the rally.
Stocks like Gillette (NYSE: G - Quotes, News, Boards), Clorox (NYSE: CLX - Quotes, News, Boards) and Coca Cola (NYSE: KO - Quotes, News, Boards) are all multi-nationals that need some pickup in foreign sales to regain some growth.
Stocks like FDX Corp. (NYSE: FDX - Quotes, News, Boards), parent of Federal Express and British Airways (NYSE: BAB - Quotes, News, Boards) have great franchises but are suffering from high oil prices. If the price of oil subsides, these are two great long-term plays, rather than just short-term trading opportunities.
Aside from these names, there is also Philip Morris (NYSE: MO - Quotes, News, Boards), Maytag (NYSE: MYG - Quotes, News, Boards) and Mattel (NYSE: MAT - Quotes, News, Boards), which will almost certainly suffer some tax loss selling this December and might see some bottom fishing in January.
Bottom Line:
The stocks above are just a few ideas that could gain momentum come January. For now, it might be a good opportunity for investors to nab shares of some companies whose shares are falling merely from tax loss selling, and not a change in fundamentals.
* Of the above I like UIS, IFMX, IBM, ANF and CPQ the best. |
