Tax-loss selling artificially depresses some stocks as Dec. 31 gets nearer. But what goes down often goes up: Year-end selling sets up these stocks for a sizeable post-New Year bounce.
Tax-loss selling is the practice of selling your losers in order to offset capital gains on which you would otherwise pay taxes. The practice is prevalent every year, but it’s likely to be especially so this year, given the market’s strength and the capital gains that many investors presumably have already realized.
It’s possible to profit from this by placing buy orders well below the market on stocks with the biggest year-to-date losses. These are the stocks that will most likely be sold for tax-loss purposes. Your hope with the strategy would be that tax-loss selling will depress these shares so much that at least a few of your buy orders get picked off — and the stocks you purchase will subsequently rebound smartly in January.
To be sure, you need to be choosy when executing the strategy since some year-to-date losers deserve to be in the dumps. One way of avoiding these so-called value traps is to consider only stocks recommended by at least one of the investment newsletters that my performance auditing firm tracks.
A year ago, I devoted a column to a list of 20 stocks constructed using this approach. The subsequent three months were an unusual period for tax-loss selling, since that column was published close to the low point of a correction and the U.S. stock market went almost straight up from then until the end of the year. From the publication date of my column until the end of 2023, just four of the 20 stocks on that list traded even 10% lower. Since I recommend that the buy limits you employ with this strategy be much larger than 10%, it is possible that no one following this strategy a year ago got any of their limit orders filled.
Still, those stocks did rebound nicely in January, illustrating the strategy’s potential. I calculated each stock’s return from (a) its lowest price from the publication date of my column until the end of the year, to (b) its highest price in January. The average across all 20 stocks was a 47.4% gain. For the four stocks that fell more than 10% after my column was published, the average gain was 51.4%.
These gains represent the upper limit of the strategy’s potential, since to achieve them you would have had to perfectly capture each stock’s low trade in late 2023 and its high trade in January 2024.
The table below contains a new list of 20 stocks constructed in the same manner as in 2023. It contains all stocks that lost at least 22% for the year through Sept. 27, and which are recommended by at least one of the investment newsletters my auditing firm monitors.
Still, those stocks did rebound nicely in January, illustrating the strategy’s potential. I calculated each stock’s return from (a) its lowest price from the publication date of my column until the end of the year, to (b) its highest price in January. The average across all 20 stocks was a 47.4% gain. For the four stocks that fell more than 10% after my column was published, the average gain was 51.4%.
These gains represent the upper limit of the strategy’s potential, since to achieve them you would have had to perfectly capture each stock’s low trade in late 2023 and its high trade in January 2024.
The table below contains a new list of 20 stocks constructed in the same manner as in 2023. It contains all stocks that lost at least 22% for the year through Sept. 27, and which are recommended by at least one of the investment newsletters my auditing firm monitors.
| Stock/Ticker | YTD Return (As of 9/27) | # of Newsletters Recommending |
| New York Community Bancorp Inc. | -62.1% | 1 |
| Five Below Inc. | -56.6% | 1 |
| Intel Corp. | -51.8% | 1 |
| lululemon athletica inc. | -45.2% | 1 |
| Leggett & Platt Inc. | -44.2% | 1 |
| Goodyear Tire & Rubber Co. | -38.8% | 1 |
| Fox Factory Holding Corp. | -38.0% | 1 |
| Cleveland-Cliffs Inc. | -37.5% | 1 |
| Moderna Inc. | -33.9% | 1 |
| Albemarle Corp. | -32.7% | 1 |
| Estee Lauder Cos. Cl A | -30.5% | 1 |
| Humana Inc. | -29.9% | 1 |
| Etsy Inc. | -29.5% | 1 |
| Worthington Enterprises Inc. | -28.4% | 1 |
| Cohu Inc. | -26.7% | 1 |
| Yelp Inc. | -26.3% | 2 |
| Mosaic Co. | -22.7% | 1 |
| Lattice Semiconductor Corp. | -22.4% | 1 |
| Amphastar Pharmaceuticals Inc. | -22.4% | 1 |
| Kohl’s Corp. | -22.1% | 1 |
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