For the past several years, I've created a year-end tracking portfolio, the Tax Loss-Selling Recovery Portfolio, based on beaten-down names that may rebound the following year.
In order to qualify, names must:
- be down at least 30% year-to-date
- trade at less than 15x their next two year's forward price earnings ratios
- have a minimum market cap of $100 million
I then whittle down the contenders into those that are most interesting to me and track them over the next year. The theory is that beaten-down names may fall further as year-end approaches and investors offset gains with losses, that pressure may dissipate in the New Year and investors may return to these names. I don't expect that all chosen names will rise, but rather that a couple or a few will hit the ball out of the park, a couple will fall further and the rest will be average.
The name of the game is that the big winners more than offset the big losers. Last year's version, my 2018 Tax Loss Selling Recovery Portfolio, did well overall. This year, I again rolled out the portfolio in three tranches of four names each (December 4, December 6, December 9) and will again track the progress moving forward to continue the quest to determine whether there's something to this strategy, or whether past successes are just plain random luck.
This year, however, there's a twist. On Thursday, I put my money where my mouth is and took small, equivalent positions in all twelve names, which is a first. From time to time, I've owned a name or two within the tax-loss selling "experiments," but now I own all of them. For the eight that are dividend payers, dividends will be reinvested. The plan is to sell out of each position around this time next year, and use the proceeds to buy next year's crop.
One area that needs some work and study is the best timing for purchases. In other words, if you buy the theory behind this, what is the optimal date to make the actual buys, in order to buy at the "bottom" and maximize gains (assuming, of course, the stock bounces)? That would involve trying to determine the optimal time that sellers move on and may be very difficult to answer with any degree of certainty, but may be a worthy pursuit.
Here is the 2019 Tax-Loss Selling Portfolio in full:
