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As we close in on year's end, this is a good time to talk about an effect that sometimes rears its head about this time of the year.

It’s the tax selling effect. The effect is simple. Basically stocks that had a lousy performance during the year might end up being sold at this time of the year to realize losses that will offset other realized gains, minimizing taxes.

At the same time, stocks that had great performances during the year might actually see a lack of selling at this time, since waiting just a few days allows their owners to delay being taxed on those stocks.

There are also two corollaries to this:

  • Right after year end, some stocks that were seeing continuous selling suddenly see that selling dry up, which might be an interesting point to buy stocks you believe were fundamentally getting better at that point, but not reflecting it.
  • Also, stocks that were doing great and seemingly had no selling, suddenly have strong selling, that was simply being delayed for a few days. This can be important for high flyers that were somehow defying fundamental deterioration.

Best performers in 2011

Here are the 7 U.S. stocks with over $10 billion in market cap and the best performance in 2011. These might be subject to less selling than would otherwise exist: Alexion Pharmaceuticals (NASDAQ:ALXN), Biogen Idec (NASDAQ:BIIB)), El Paso (EP), Humana (NYSE:HUM), Intuitive Surgical (NASDAQ:ISRG), Mastercard (NYSE:MA), V.F.Corporation (NYSE:VFC). A brief fundamental characterization follows:

El Paso Corp. (EP)

El Paso Corp. has a market capitalization of $19.3 billion, and is trading at a TTM P/E of 832.67 with expected earnings growth of 14.81%, taking it to a forward P/E of 20.15 next year. The TTM PE means EP trades at a premium to S&P500's TTM P/E of 13.0. The Price/Book is 4.41. EP's numbers are distorted by the deconsolidation of a subsidiary, which meant a $600 million hit to earnings.

EP's dividend yield is 0.16%, for a dividend payout of 167.18%. The ROE is just 0.48%.

EP is up by 81.94% year-to-date.

Intuitive Surgical, Inc. (ISRG)

Intuitive Surgical, Inc. has a market capitalization of $16.8 billion, and is trading at a TTM P/E of 37.32 with expected earnings growth of 19.22% taking it to a forward P/E of 30.56 next year. ISRG also trades at a premium to S&P500 TTM P/E. The PEG stands at 1.83. The Price/Book is 7.11.

The ROE is high at 21.25% but this is partly due to very low book value, since the stock is trading at a Price/Book of 7.11.

ISRG is up by 67.65% year-to-date.

Alexion Pharmaceuticals, Inc. (ALXN)

Alexion Pharmaceuticals, Inc. has a market capitalization of $12.3 billion, and is trading at a TTM P/E of 82.96 with expected earnings growth of 31.54% taking it to a forward P/E of 38.81 next year. ALXN also trades at a premium to S&P500 TTM P/E. The PEG stands at 2.24, this could suggest some overvaluation. The Price/Book is 11.62.

The ROE is high at 16.45% but this is partly due to very low book value, since the stock is trading at a Price/Book of 11.62.

ALXN is up by 64.77% year-to-date.

Biogen Idec Inc. (BIIB)

Biogen Idec Inc. has a market capitalization of $26.8 billion, and is trading at a TTM P/E of 22.98 with expected earnings growth of 6.96% taking it to a forward P/E of 17.51 next year. BIIB also trades at a premium to S&P500 TTM P/E. The PEG stands at 2.37, this could suggest some overvaluation. The Price/Book is 4.30.

The ROE is quite high at 20.84%, which is usually a sign of a good business (though sometimes cyclicality can be the reason).

BIIB is up by 64.49% year-to-date.

Mastercard Incorporated (MA)

Mastercard Incorporated has a market capitalization of $46.0 billion, and is trading at a TTM P/E of 20.30 with expected earnings growth of 16.84% taking it to a forward P/E of 16.67 next year. MA also trades at a premium to S&P500 TTM P/E. The PEG stands at 1.10. The Price/Book is 7.70.

MA's dividend yield is 0.17%, for a dividend payout of 3.39%.

The ROE is high at 42.54% but this is partly due to low book value, since the stock is trading at a Price/Book of 7.70.

MA is up by 61.95% year-to-date.

Humana Inc. (HUM)

Humana Inc. has a market capitalization of $13.9 billion, and is trading at a TTM P/E of 10.76, but earnings are expected do decline at a -5.11% rate, making the forward P/E 10.62 next year. HUM still trades at a discount to S&P500 TTM P/E. The PEG stands at 1.22. The Price/Book is 1.76.

HUM's dividend yield is 1.18%, for a dividend payout of 6.19%. Some thought must be given to the fact that earnings are expected to fall.

The ROE is quite high at 17.94%, which is usually a sign of a good business.

HUM is up by 55.79% year-to-date.

V.F. Corporation (VFC)

V.F. Corporation has a market capitalization of $14.2 billion, and is trading at a TTM P/E of 20.79 with expected earnings growth of 15.37% taking it to a forward P/E of 13.58 next year. VFC also trades at a premium to S&P500 TTM P/E. The PEG stands at 1.66. The Price/Book is 3.17.

VFC's dividend yield is generous at 2.24%, this equates to a dividend payout of 40.16%. The dividend exceeds the S&P500 dividend yield, presently at 2.1%. The dividend is higher than the yield on the 10 year bond, presently at 1.85%.

The ROE is quite high at 16.31%, which can be a sign of a good business.

The stock has been punished lately, being down -5.98% in just the last week. However, year-to-date the stock is still up by 52.72%.

Worst performers in 2011

Here are the 2 worst performing, with a market capitalization over $10 billion. These might be subject to more selling due to loss realization: Bank of America (NYSE:BAC), American International Group (NYSE:AIG). A brief fundamental characterization follows:

Bank of America Corporation (BAC)

Bank of America Corporation has a market capitalization of $52.8 billion, and is trading at forward P/E of 5.31 next year. BAC has a low Price/Book of 0.23. There are studies that indicate that low Price/Book stocks outperform over time, although some times the low Price/Book is also an indication of risk or permanently bad profitability.

BAC's dividend yield is 0.77%.

The ROE is -1.46%, because of recent losses.

The stock has been punished lately, being down -9.09% in just the last week and is also down -60.84% year-to-date.

American International Group, Inc. (AIG)

American International Group, Inc. has a market capitalization of $44.4 billion, and is trading at a forward P/E of 8.82 next year. AIG has a low Price/Book of 0.52.

The ROE is -5.05%, meaning AIG has been showing losses in this past year.

AIG is down by -51.62% year-to-date.

Conclusion

If you feel a stock you’re following has had too much selling lately given recent fundamental developments, or to the contrary, too little selling given recent fundamental deterioration, it might make sense to check how that stock is doing in terms of performance year-to-date, as at this time of the year that fact can have some market impact on the decisions of buyers and sellers.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: The Tax Selling Effect