I've long been fascinated by tax-loss selling, especially because I am no stranger to owning companies that many others shun. Markets can over-punish names that have a few (or many) fleas, and this can create opportunities for those with strong stomachs.
As the year-end approaches, it is time to identify potential tax-loss selling candidates -- those that investors will sell in order to offset gains. Some of those affected may have the wherewithal to bounce once the selling pressure ends and the New Year begins, although there are no guarantees. Sometimes companies are too broken to fix.
Last year, I utilized a rather simple screen in an attempt to identify potential candidates for purchase, and followed it up with a few more candidates days later.
The screening criteria included the following:
- down at least 30% year to date,
- forward price-to-earnings (P/E) ratios below 15 in the next two fiscal years
- minimum market cap of $100 million
While 42 names made the cut, I honed the list down to six, and the results were mixed, but interesting enough that I'll be repeating the process this year.
The results provided more ammunition for the notion of taking a scatter-gun approach -- purchasing several qualifying names instead of concentrating your investment in one or two. It was the great Peter Lynch who wrote that if you buy five stocks, one likely will knock the lights out, one will perform poorly and the other three will be about flat. The hope is the one that rises does so well that it provides a solid overall return, more than compensating for the other four. That was certainly the case here, although in this instance we focused on six stocks, not five.
With an average return of 47%, you could call this experiment a success, although I am not yet convinced; it appears that it was more luck than skill. Weight Watchers International Inc. (WTW) absolutely crushed it, up 309% amid renewed interest among investors and some solid results. However, from there, there was not a whole lot of excitement. Gannett Co. (GCI) was up about 20%, part of which was due to a solid dividend. Gener8 Maritime Inc. (GNRT) (up 12%), and Waddell & Reed Financial Inc. (WDR) (up 4%) were in positive territory, but underperformed the market.
Fitbit Inc. (FIT) was down about 10%, unable to attract enough positive interest or belief that the company can turn the corner despite a few positive signs, some new products and a solid balance sheet.
The biggest loser, however, has been nutritional products retailer GNC Holdings Inc. (GNC) , which has suffered through another very rough year, with the stock down 56%. Last year, when I wrote the initial column, it was trading at around 6 times 2018 consensus earnings estimates. Those estimates have been dialed back, the stock price has been cut in half, and it now trades at about 4.5 times 2018 estimates. The market is putting GNC in the "cheap for good reason" category.
I'll be repeating last year's experiment in an coming column.
