Every year investors review their portfolios and projected taxes and many prudently decide to minimize their taxes by selling some of their losers. This is intuitively obvious, but periodically academic research bears it out as well. In a year where the S&P's total return is close to 30%, big losers are harder to find. As they don't often say, "There is always a bear market somewhere." Rationally or not, stocks that lost value during the year often lose more value (or fail to rise with the market) as they are more aggressively sold off to stave off the tax man. One might argue that in such a big up year, these losers might take it even harder on the chin.
Obviously, you should not buy companies at the end of the year just because they've gone down. You can create a good candidate list by performing a screen for large decliners and then searching for higher quality names to research further. I've collected a list of potential 2014 winners from 2013's losers. Each of these companies was sold off for its own reasons so you should do your own research before diving in. Do it quick however, 2014 is coming fast. I believe these five stocks have a reasonable risk/reward profile going into 2014. While solid investments in their own right, they should receive an extra boost as the tax loss sellers are no longer pressuring the stocks.
|Tax Loss Stock||Ticker||YTD Loss||Ent. Val.|
|Chemical & Mining Co. of Chile||SQM||-59.5%||7.10 B|
|Strayer Education||STRA||-38.9%||0.40 B|
|Weight Watchers||WTW||-38.5%||4.09 B|
|Cirrus Logic||CRUS||-31.4%||0.99 B|
|Newmont Mining||NEM||-50.2%||17.01 B|
Sociedad Quimica y Minera De Chile
SQM (translated as: Chemical & Mining Co. of Chile) was underperforming even before getting crushed when Uralkali blew up its potash cartel relationship with Belaruskali. As Dan Strack pointed out, potash only accounts for only 28% of SQM's revenue. With other business lines, including a strong Lithium business critical for the rapid growing electric car market, SQM's valuation is probably near a trough. In October, Matt Craze at Bloomberg News pointed out that Potash Corp. (NYSE:POT) likely still has designs on SQM after failing to buy them in 2006. The price decline in SQM only makes it more attractive.
The for-profit education sector has been hit hard over the past few years but some companies are cleaning up their act. Human capital is ever more critical in our modern economy. Strayer is trading at a reasonable valuation (7x trailing, 15x forward) for a company being turned around. If performance improves faster than expected, like it did with last quarter's earnings beat, the stock could take off. You can read a variety of bullish pieces on the Strayer page on Seeking Alpha.
Apparently, people are using their smart phone apps to lose weight and are going to fewer meetings at Weight Watchers and Jenny Craig. WTW's stock has been rocked by some of these trends. However, obesity remains a major problem in America and a growing one elsewhere. There is room for many successful players in this space and WTW is one of the more proven alternatives. As described by Bram de Haas, the company has the strongest brand in the space and a solid business model. Some of the growth initiatives (mobile, licensing) will cushion the decline of the meetings business. The company still has some indigestion from its large stock buybacks of the past few years, but continues to generate cash flow. If the business stabilizes or starts growing, WTW stock price will bulk up in a good way.
Apple's ecosystem is a notoriously difficult place to invest as Apple tries to extract the best and most profitable deals. Oftentimes this means playing various component suppliers against each other. CRUS has been slammed multiple times on worries that Apple will replace it in its flagship products. Given CRUS dependence on Apple, caution is warranted. Nonetheless, its valuation is quite inexpensive, less than 8x projected EV/Earnings. However, if CRUS maintains or grows its Apple relationship and expands is non-Apple businesses (other OEMs, LED dimmers, power supplies, portable audio - smartwatches!) it could easily go up 50%-100%. Recently, Indie Analyst listed 8 reasons to buy Cirrus.
The gold mining stocks have been horrific for over two years now. The "safe haven" of gold has proven to be anything but safe since the peak in 2011. Who knows what the future will bring for gold prices but at these levels new production is probably on hold at most miners. If the Fed's never-ending QE program does cause inflation over the medium to long term, gold and therefore the gold miners could be big beneficiaries. Newmont happens to be one of the larger miners but this tax loss strategy could work with many of the stocks or even the Gold Miners ETF (NYSEARCA:GDX) or Junior Gold Miners ETF (NYSEARCA:GDXJ).
If you look carefully for bargains, you can profit from other investors short term need for tax losses. These five provide a basis for further research. If you have other good candidates please share them in the comments.
Disclosure: I am long WTW, CRUS, POT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.