In December, I'll be rolling out my 2021 Tax Loss Selling Portfolio -- created in 2020 -- and wanted to give an early preview. What a year it has been. The S&P 500 is up about 8.5% year-to-date, a long way off of its pandemic lows, but the winners have been fairly concentrated. In addition, small and microcaps have not done as well as their large counterparts with the Russell 2000 Index down 4.5%, and Russell Microcap down 4%, and value has gotten trounced (R1000 Value -9%, R2000 Value -16%, RMicro Value -16%). Long story short, there should be plenty of names to choose from.
The idea is to identify those that might ultimately recover in the new year. And, beaten-up stocks often face greater pressure heading into year-end as investors and institutions sell off the losers in order to offset gains. That might set them up for a recovery in the new year.
The screening criteria are very simple:
- Down at least 30% year to date,
- Forward price earnings ratios below 15 in the next two fiscal years
- Minimum market cap $100 million
In 2016, 42 candidates made the final cut. That number more than doubled in 2017, exploded to more than 200 in 2018, and was back down to 70 last year. From those candidates, as is typical, I will narrow the list down to those that I find most interesting. While it's too early to predict how big the pool will be this year come December, there are currently 206 names with a minimum market cap of $100 million that are down at least 30% over the past year. I will revisit that list with updated, year-to date return figures, and forward price earnings data in late November.
There are some decent sized names on the list, at this point anyway, including Wells Fargo (WFC) , Enterprise Products Partners (EPD) , Phillips 66 (PSX) , American International Group (AIG) , and Tyson Foods (TSN) .
The list is dominated by banks (more than 70), and oil and gas related names, with more than two dozen. There are also a dozen or so retailers including Kohl's (KSS) , Macy's (M) , Guess? (GES) , and Nordstrom (JWN) .
I believe the list would be a lot bigger were it not for the uncertainty of next year's earnings, and analysts cutting estimates due to the pandemic. Qualifiers require a forward PE of 15 or less for the next two years.
The notion of buying down and out names that also have relatively cheap valuations has been a fairly successful strategy in the years I've been conducting this experiment. The jury is still out in this year's version however. They don't all work out, some of the names continue to get hammered, and there's usually one or two out of the group that soar. This year, the biggest winners so far are Turtle Beach (HEAR) , Tupperware (TUP) , and B&G Foods (BGS) . However, strong performance from those names has been offset by awful performances by Spirit Airlines (SAVE) , Fluor (FLR) , and AMC Networks (AMCX) . Last year it was Winnebago (WGO) , Skechers (SKX) , and General Mills (GIS) that drove returns. In 2018 it was Dine Brands Global (DIN) and Wesco Aircraft Holdings (WAIR) that did the heavy lifting. In 2017, it was all Weight Watchers (WW) .
What 2021 will bring remains to be seen, but I am looking forward to it... 2020 has long ago worn out its welcome.