By Jacob Sonenshine
A host of stocks just took hits because of what is known as tax-loss harvesting. Now, some of them are likely to bounce back -- presenting an opportunity for a quick trade.
Tax-loss harvesting is when investors sell underperforming assets to reduce their portfolio's overall tax bill. The taxes are on realized gains, so selling an asset that is already down reduces the portfolio's overall realized gain and thus increases the value of the portfolio.
Usually, portfolio managers implement this tax strategy by selling before the end of December. The key for traders: Once the selling is over, these stocks become more likely to bounce. Since the selling isn't on the back of worsening fundamentals from these companies, some of them could easily become undervalued, which encourages dip-buyers to come in -- sending the prices of these names back up.
That's why Evercore strategist Julian Emanuel screened for stocks that have fallen victim to tax-loss harvesting and look primed to pop.
He looked for stocks that are in the U.S. equity market's 25th percentile of performance for the year, and were trading in their 25th percentile of their own average price for the year, as of Monday morning. They also have to be in the bottom three quintiles of Evercore's valuation criteria, essentially meaning they have to trade at low enough forward price/earnings multiples. All companies on the screen had to have a $5 billion market capitalization to avoid very small names that are difficult to trade.
Of the stocks on the list, we chose the ones that are down for the fourth quarter. Those are more likely to have seen tax-loss selling.
A dozen of them are UnitedHealth Group, Comcast, Kraft-Heinz, HP Inc., Motorola Solutions, Strategy, General Mills, CDW, Gartner, Godaddy, DocuSign, and Carrier Global.
Carrier is an HVAC manufacturer whose stock we recommended in March. The stock is down 22% this year, which includes a 12% drop in the fourth quarter thus far.
One of the key concerns has been that the residential portion of the HVAC business, which is a major chunk of the company's total sales, has disappointed. If the housing market improves, which lower interest rates will help with, the stock could easily recover.
Plus, a smaller portion of Carrier's business is selling the products to companies that are building data centers, an area that's growing quickly. This can help grow profits.
Combine the potential earnings growth with the fact that Carrier trades at a lower P/E multiple versus peers Johnson Controls, Trane Technologies, and Lennox International, and the stock could easily rebound.
One way to reap the upside potential in Carrier stock -- or the other fallen shares in Emanuel's screen -- is to buy it outright.
Another is to buy call options on these names, which increases the potential returns. That doesn't mean buying calls is a sure shot at great returns. Traders must pay a "premium," essentially the price to own a call option, which means the potential payout of the call has to be large, not just a slim profit. But traders who believe the price of a stock could skyrocket should pay the premium to own the call -- and the payout of the option would be large.
Whether one wants to buy some of these stocks outright or buy the calls, Emanuel's list is a good one to pick from.
Write to Jacob Sonenshine at jacob.sonenshine@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
December 22, 2025 13:55 ET (18:55 GMT)
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