What gets harvested at the end of the year? It is the wrong time of year to harvest most crops, but it is the perfect time to "harvest tax losses."
What is Tax-Loss Harvesting?
Tax-loss harvesting is a means of neutralizing capital gains taxes by selling off losing stocks in your portfolio. The end of the year is an ideal time for portfolio re-assessment, since you have a good idea of what your capital gains are likely to be for the year.
Investors that engage in tax-loss harvesting generally jettison the same underperforming stocks — which ironically makes some of them great buying opportunities for others. A seasonal surge of selling can drive the price of underperforming stocks even lower than their true market value. If the fundamentals behind the company are sound and there are logical reasons why the stock may rebound after the New Year, why not consider buying?
Start by looking for larger stocks that are underperforming and have been over the course of the entire year. Forbes printed a list of 130 companies out of the S&P 500 that met three criteria of poor performance for 2015: a year-to-date double digit percentage drop in the stock price (dividends included), stock prices below 200-day averages indicating a lasting downward trend, and current prices at least 20% below the 52-week peak.
Well-known companies in this list include Monsanto (NYSE: MON), Alcoa (NYSE: AA), Chevron (NYSE: CVX), American Express (NYSE: AXP), Caterpillar (NYSE: CAT), International Business Machines (NYSE: IBM), and Yahoo! (NASDAQ: YHOO).
The entire Forbes list of underperforming stocks to consider may be found here, but it may be best to run your own list and keep the information as updated as possible. You may also have more stringent or loose criteria that you prefer to use in your initial search.
After running the first set of screenings, look over the list to see what would fill in holes in your portfolio with respect to the proper risk and reward. Bargains are not necessarily bargains if they throw your portfolio out of balance. Next, review the company fundamentals such as price-to-earnings ratios, cash position, debts, and outlooks for both the field and company.
For example, consider the heavily battered oil and gas field. The field is home to 25 of the 130 companies on the Forbes underperforming list, including some of the highest losses on that list. CONSOL Energy (NYSE: CNX) is down 77% for the year, Chesapeake Energy (NYSE: CHK) with 72%, and Southwestern Energy (NYSE: SWN) by 64%. Most forecasts predict low oil prices for quite some time, and poor short-term prospects for oil and gas companies. Are you willing to buy and hold for a long-term return that may be months, if not years away? Can the company even survive in the long-term?
You need not stick with risky oil and gas investments, as almost every sector is represented by at least several companies on the underperforming list. Even real estate investment trusts (REITs) make the list, which is remarkable given that REITs have tended to outperform most investments.
Perhaps you have few losing stocks to sell, or capital gains to offset. Maybe you should look at some end-of-year buying opportunities. What better way to start the New Year by giving yourself a holiday gift of stock bargains? Just make sure you do your homework first so that you do not end up with the equity equivalent of a lump of Christmas coal.