By Paul R. La Monica
Thanksgiving is next week, and the December holidays are right around the corner. While this might spur thoughts about eating, drinking, and being merry with friends and family, the end of the year should also remind investors of a less festive activity: dumping losers in their portfolios.
Wolfe Research pointed out in a recent report that it's now a good idea to avoid stocks that are already dogs.
"The reason is that the market's biggest laggards can be subject to selling pressures by individual investors looking to harvest capital losses," Wolfe Research chief investment strategist Chris Senyek said in the report.
Senyek added that institutional investors -- like big mutual funds and hedge funds -- also look to sell their underperforming holdings and buy winners toward the end of the year in order to clean up, or "window dress," their portfolios to make them look better for prospective investors.
But Senyek takes it a step further. He says the "sweet spot for the tax-loss selling trade" typically lasts between Nov. 15 to Dec. 15 and that it makes sense for investors to short shares of some of the high-profile stocks that should be tax-loss candidates. Shorting a stock means borrowing and selling shares with the hopes of buying them back later at a lower price and pocketing the difference as a profit.
Senyek said this strategy was a winner eight years ago following Donald Trump's first presidential victory.
"While the tax-loss selling trade has not always worked in Presidential election years, these stocks did underperform...in 2016," he wrote.
So what are some of the stocks investors should consider shorting? (Or at the very least, staying away from since there could be further downside?)
Struggling consumer and retail names Walgreens, Dollar Tree, and Estée Lauder topped the list. Those three stocks are among the worst five performers in the S&P 500 so far this year. Dollar Tree competitor Dollar General, which is the ninth-worst performing S&P 500 stock, made the list of potential tax loss sellers too.
Walgreens rival CVS Health also made the cut, as did biotech Moderna, the second-worst S&P 500 stock. Shares of the vaccine maker have plummeted more than 60% in 2024. Athletic apparel giants Nike and Lululemon Athletica, which have also stumbled lately, made the list too.
Wolfe Research also highlighted unprofitable electric-vehicle makers Lucid and Rivian, which have each fallen sharply in 2024, as tax loss short candidates as well.
But there's a flip side to this equation. Savita Subramanian, head of U.S. equity and quantitative strategies at BofA Securities, noted in a report earlier this month that there are also several "stocks that may be temporarily depressed by tax-loss harvesting but could outperform in subsequent months on solid fundamentals."
BofA said that Ford Motor, Adobe, oil services giants Halliburton and Schlumberger, and glucose monitoring maker DexCom are some of the buy-rated stocks that are down sharply this year but are poised to rebound after tax-loss selling has run its course.
Write to Paul R. La Monica at paul.lamonica@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
November 19, 2024 13:19 ET (18:19 GMT)
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