Tax reasons: Stocks sold for tax reasons often surge at year-end: Bank of America | 20 minutes to read

 

Stocks sold for tax reasons often surge at year-end: Bank of America

Ethan Wolff-Mann

·Senior Writer

Wed., October 27, 2021, 7:14 a.m.

Tax-loss harvesting is a popular and effective way for investors to minimize capital gains – you sell stocks in the red and use those losses to offset the capital gains and reduce tax bills. You can use losses on ordinary income if you don’t have any gains.

But because this particular strategy usually happens at the same time on the calendar — the end of the year for individuals and the end of October for institutional investors — patterns emerge, according to a note from Bank of America (BAC) equity and quant strategy analysts.

Looking at data since 1986, analysts found that stocks that saw a 10% or more loss as of late October experience a bounce from Nov. 1 to Jan. 31, outperforming the S&P 500 (^GSPC) 70% of the time. The thinking is that these “losers” are often unloaded to offset gains and thus get temporarily depressed in value.

“On a monthly basis, this strategy [of buying a basket of these struggling stocks] tends to have the highest median returns in November and January, perhaps benefitting from the rebound after the Oct. 31 deadline for tax loss selling for mutual funds and then the rebound after the Dec. 31 deadline for regular tax filers,” analysts wrote.

An interesting strategy

The methodology examined S&P 500 member stocks that fell 10% or more, calling them “tax loss candidates,” and found that the numbers strongly depend on how well the index does. (In years where the index is down, more stocks are usually down.)

This year, however, the S&P 500 is up almost 24% as of Oct. 26. That rising tide has lifted most stocks, leaving fewer than normal at the bottom as “tax loss candidates.”

As of Oct. 22, just 30 out of 500 stocks in the index had the ignominious distinction of dropping 10%, compared to an average of 127. (In good years when the index has gained at least 20% by late October, the Bank of America analysts said the number of 10% losers drops to an average of 44 stocks.)

With the stat that the losers end up overperforming the market 70% of the time between November and January in mind, the strategists mined this year’s crop of 30 to look for potential.

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“To identify [tax-loss candidates] – stocks that may be temporarily depressed by tax loss harvesting but could outperform in subsequent months on solid fundamentals – we screened the S&P 500 for stocks with YTD price declines greater than 10% as of Oct. 22 (30 stocks), and include those which are Buy-rated by BofA (13 stocks, below),” the analysts said.

Here are the stocks they found that were both down 10% and had an in-house buy rating: Global Payments (GPN), Viatris (VTRS), Lamb Weston Holdings (LW), Incyte (INCY), Vertex Pharmaceuticals (VRTX), Qualcomm (QCOM), Penn National Gaming (PENN), T-Mobile US (TMUS), Fidelity National Information (FIS), AT&T (T), Western Union (WU), Fedex (FDX), and Ross Stores (ROST).

History’s good fortune shown to stocks that people sold as losers for tax reasons, of course, is no guarantee that it’ll be the same this year. It hasn’t always been the case every year, even if in most years this strategy works. Other things could be in play, and the paucity of this year’s crop of 30 struggling stocks — vs. the average of 127 — might complicate things. If you’re already sitting on a -10% loser year-to-date, you know successful stock picking is tough to do.

Still, the S&P 500 has historically performed well between November and January since 1936, the analysts point out. There’s definitely a case for simply buying and owning the market if you’ve had a tough year.