Tax-Loss Selling Could Create Opportunity in These 7 Stocks

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One of the negatives of a bull market that has helped portfolios to grow is the possible tax bill. As investors look toward the end of the year, some are looking to realize losses on laggards to help offset the tax hit on the winners. And that selling could create opportunity in those money-losing stocks.

Taxes have been top of mind, especially as Congress wrangles over the Build Back Better spending package. As of the latest negotiations, it appears that an increase in capital-gains tax that some had wanted to be retroactive to 2021, isn’t in the cards, according to Ben Koltun, director of policy research at Beacon Policy Advisors. Still up for debate: a surtax on adjusted gross income that would effectively increase capital gains for those either making $5 million or more, or $10 million or more. Koltun says the rate could be anywhere from 3% to 8%, but that a retroactive move isn’t on the table.

Whether the legislation brings increased bills or not, tax-savvy market participants are already maneuvering to mitigate the hit from levies already in place, as they frequently do near year-end. Institutional investors often engage in tax-loss selling starting in October, while retail investors start in December, according to Bank of America strategists.

Since 1986, when the Tax Reform Act was passed, stocks down 10% or more from Jan. 1 through Oct. 31 have beaten the S&P 500 by 1.6 percentage points on average over the following three months, according to a recent note by Bank of America strategists. “A strategy of owning [companies that could be targets for tax-loss selling] from Nov.-Jan. had a good record from 2000-12 and 2016-20, outperforming in all but two of those years,” they wrote.

Looking at laggards this year could be a good starting point for near-term stock opportunities. Barron’s screened the

S&P 500,
looking for stocks that had at least a 10% decline so far this year as the broader market has charged higher. That turned up a small group. We pruned it further by tossing out companies that had Buy ratings from fewer than two-thirds of analysts tracked by Bloomberg, or median 12-month target prices implying gains of less than 30%.  

The list includes seven companies, including financial-services technology firms

Fiserv

(FISV) and Fidelity National Information Service (FSI), the chip maker

Qualcomm

(QCOM), and the videogaming and entertainment company

Activision

(ATVI). While all have taken a beating, each has the potential to gain.

Company/Ticker	YTD Stock Return %	% of Analysts with Buy Rating	Forward P/E
Qualcomm/QCOM	-12.2	71%	14.2
T-Mobile US/ TMUS	-13.4	82%	36.2
Fiserv/FISV	-13.9	82%	15.5
Activision Blizzard/ ATVI	-14.2	91%	18.9
Fidelity National/FIS	-18.4	74%	15.5
Vertex Pharmaceuticals/VRTX	-23.2	73%	14
Global Payments/GPN	-33.3	82%	15.3

Note: Data is as of Oct. 27.

Source: Bloomberg

Fiserv, for example, has been under pressure in part because of its debt load. But RW Baird analyst David Koning wrote in a recent note that Fiserv’s earnings and revenue growth “will likely be about the best it has been in multiple decades” over the next few years as the company chips away at its debt. While risks persist as the company integrates its 2019 acquisition of First Data, Raymond James analyst John Davis sees a company in the midst of a transformation, with a cheap valuation and prospects for earnings growth in the mid teens for the foreseeable future.

Videogame stocks have been in a rut as the economy reopens and people leave the cocoons of their houses, but JP Morgan analyst Alexia Quadrani sees a potential break ahead as Activision and its rivals release new games and increased scrutiny and challenges for social-media companies shift investors’ interest toward the group. Though the company has difficulties, including turnover at its Blizzard operation, Quadrani rates it as Overweight. One reason, she said, is that Activision has a robust pipeline of new games over the next 18 to 24 months.

Qualcomm’s (QCOM) shares have been under pressure this year as it grapples with the continuing shortage of semiconductors. Downgrades by analysts and worries about weak Chinese demand for handsets weighed on the stock. But demand for 5G phones has been strong, supporting the chip maker’s results. Analysts expect the company could see further earnings revisions, with analysts raising their estimates, which would help the stock. Another plus: The company just announced a $10 billion stock buyback plan.

T-Mobile

(TMUS) is part of a sector under pressure due to concerns about how long wireless subscriber growth continues. But Morgan Stanley analyst Simon Flannery expects clarity into 2022 around a $60 billion stock buyback the company has proposed as it begins to generate increasing free cash flow, book savings from its Sprint merger, and capital spending for building out its 5G network diminishes.