Next week I'll start rolling out my 2021 Tax Loss Selling Recovery Portfolio. It's a rather simple idea that has turned into an annual experiment. The objective is to identify potentially cheap names that have fallen sharply over the past year and that might be pushed even lower at the end of this year as investors harvest losses, but then may recover in the new year when the selling pressure is off.
Screening criteria include 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
I again will narrow down the list of candidates to 12 and release them over three columns.
At this writing, there are about 120 candidates, but that number will continue to change as markets gyrate. In late August, when I did an initial preview, there were more than 200 qualifiers, but the rising market tide has lifted many boats.
Last year, there were 70 candidates, just a third of what I saw the prior year. However the 12 selected from that group performed well overall, up more than 35% and well ahead of the benchmarks, which greatly exceeded my expectations.
I must admit that I am not all that excited by the current crop of candidates. It is very heavy on three sectors: banks, oil and gas, and real estate investment trusts (REITs), with a handful of retailers sprinkled in. At the top of the list in terms of market cap at this point are Citigroup (C) and Wells Fargo (WFC) .
Perhaps surprisingly, no restaurants currently make the cut, but upon further inspection, this makes sense. First, for the most part, restaurant stocks were not crushed to the extent you might expect in 2020. There are just a handful at this point that are down more than 30%; those that are down more either have loftier forward price-to-earnings ratios than is required or are not expected to be profitable.
I've got my work cut out for me with this year's motley crew. I'm not big on banks -- nothing against them, but the sector has never been an area of interest, and frankly, I don't have a good understanding of how they work.
As unexciting as the current crop of candidates is, perhaps there will be some changes over the next week or so. But either way, the show must go on.
