As the year comes to a close, a wave of tax loss selling is bound to hit stocks that already are down for the year, sending their share prices plunging yet more. Investors who are planning to dump these losing shares thus might consider doing so early, ahead of the general rush to book tax losses.
In particular, four well-known stocks that already are down sharply in 2019 are likely to be prime targets of tax loss selling, per a report in Barron's1 . These are, with their year-to-date losses through the close on Dec. 2: Macy's Inc. (M), -48.3%, Occidental Petroleum Corp. (OXY), -37.0%, 3M Co. (MMM), -11.7%, and Abiomed Inc. (ABMD), -40.9%. By comparison, the S&P 500 Index is up by 24.2%.
- Beaten-down stocks face more battering from tax-loss selling.
- Holders of these stocks may consider selling early.
- While big losers often rebound in January, this is not a sure thing.
Significance For Investors
Academic research finds that stocks suffering big declines in a given year often rebound the following January after tax loss selling has abated and bargain hunters start buying. Indeed, some investors might point to the recent example of General Electric Co. (GE), which plummeted by nearly 35% from late November to December 2018, pushing its price down by 57% for the year. Then, in January 2019, it surged by 34%, far better than the 8% gain for the S&P 500 in that month.
However, much more than seasonal factors were at play in GE's rebound, the upshot being that it cannot be cited as a typical case. Among other factors, moves by new CEO Larry Culp to improve cash flow and reduce debt apparently inspired investor confidence. Another factor was the earnings report for Q4 2018, released on the last day of January 2019, that beat expectations, per The Motley Fool.
Here's a look at 3 possible big losers.
Macy's is a leading nationwide department store chain that has suffered in the face of growing online competition in retail. Results for fiscal Q3 2019 were discouraging, with same-store sales down by 3.5% from the same period in 2018, leading management to reduce its guidance for fiscal 2019. "The products it sells and the environments in which it sells them are not aligned with what consumers want,” Neil Saunders, managing director of research firm GlobalData Retail, told The Wall Street Journal3 .
3M is a diversified industrial products company, whose best-known consumer products include Scotch Brand Tape and Post-it Notes. Its Q3 2019 results showed year-over-year revenue declines in about 33% of its markets, for an overall drop of 1.3% after excluding currency fluctuations and the impact of acquisitions. Sales in China were down by 9.4%, and the automotive and electronics markets were particular sources of weakness. Based on "our expectation of continued softness in China, automotive and electronics," CEO Mike Roman said, "We anticipate [Q4 2019] earnings in the range of $2.05 to $2.15, and an organic sales decline of 1 to 3 percent," per 3M. GAAP EPS was $2.27 in Q4 2018.
Abiomed is a medical devices company. The company's shares have been battered by research finding significantly increased risk of bleeding, acute kidney injury, stroke, and death among patients treated with its Impella heart pumps rather than balloon pumps, per MassDevice.com. Abiomed is questioning the validity of the study.
Investors face a complex set of decisions regarding losing stocks as the year draws to a close. If they see fundamental reasons to expect a rebound, notably prospects for improved earnings, they may choose to hold on. If not, selling may be warranted even if there is no need to book a tax loss. A third alternative is to sell in December, recognize a tax loss for 2019, and then reacquire the stock later. However, to avoid triggering the wash-sale rule, which would void the recognition of a tax loss, such a repurchase must take place more than 30 days later, by which time the price may have risen to an unattractive level.