Prepare for Tax-Loss Selling

 | Nov 05, 2013 | 3:00 PM EST  | Comments
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One key to being a good investor, as well as getting consistent solid performance from your portfolio, revolves around maximizing one's advantages in the market. Monday, I wrote about the market for initial public offerings and strategies that I have used to find opportunities within that segment.

Today, let's review how to take advantage of tax-loss selling, which will be ongoing throughout the end of year. Tax-loss selling involves selling stocks that have declined in order to reduce the capital gains accrued throughout the rest of your portfolio.

It is a smart tax avoidance strategy that many investors and mutual funds employ in the fourth quarter of every year. This is especially true in years when the overall market has had strong performance and there are higher capital gains to offset. It also provides an opportunity for patient and prepared investors to pick up 2013 laggards that will be sold off even more over the next few weeks during tax-loss selling.

These harvested tax-loss equities tend to have stronger performance early the next year as the market rectifies some of their oversold status from late the prior year. Some lagging names that sold off late last year only to bounce nicely higher in 2013 include Best Buy (BBY) and Hewlett-Packard (HPQ).

One of the worst-performing sectors this year has been the gold and silver miners. Many miners are down 40%, 50% or more so far in 2013. I would expect this area to be ripe for tax-loss selling over the next few weeks. If this seasonal event occurs as predicted across the sector, I will be looking to add to some recent positions in silver miner Endeavour Silver (EXK) or gold miner Gold Fields (GFI). These stocks have continued to be under pressure since I highlighted them over the summer, but should have a much better 2014.

Another area that has had a tough year is agricultural, construction and mining equipment, which Deere (DE) and Caterpillar (CAT) can attest to. Titan Machinery (TITN), which owns and operates a network of full service agricultural and construction equipment stores in the U.S. and Europe, has also been negatively affected. Titan has obviously been hurt by the slowdown in these end markets. The stock has fallen to a $17 a share from a high earlier in the year of $32.

There are reasons to believe, however, that 2014 might bring a change in fortune for this company. Even as earnings have declined and profit margins have been under pressure this year, the company is still growing revenues at a double-digit rate this year and it has more than tripled sales over the last five years.

The company is well positioned in the long term to benefit from the strength of the agricultural sector domestically. It also should be buoyed if the construction market picks up, either via infrastructure spending or as the housing market continues to rebound. The stock sells for 8.5x the most recent fiscal year's earnings and has technical support at $16. If tax-loss selling brings it down to that level again by the end of the year, I will be a buyer.

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