What is tax-loss selling?
Tax-loss selling (or tax-loss harvesting) is a strategy investors use to lower their capital gains tax. When investors take part in tax-loss selling, they sell a security at a loss in order to offset capital gains. These losses can then be deducted against taxable capital gains in the current tax year.
For example, December 23 is the 2016 deadline for tax-loss selling on the Toronto Stock Exchange. If you sell at a loss on or before that date, you get to deduct your loss against your 2016 capital gains.
If you still have capital losses left over, you can carry them back up to three years (2015, 2014 and 2013), or forward indefinitely to offset future capital gains.
Tax-loss selling can create great bargains in high-quality stocks
In the final couple of months of the year, some investors dump stocks impulsively, in an unthinking attempt to cut their taxes. In some cases, they simply want to sell and be done with it. In others, they intend to buy back the stock after 30 days. (That’s because, under the “superficial loss rule,” you cannot deduct your loss if you buy back any sooner.)
The lure of cutting taxes can spur investors to make costly mistakes. Often they’ll dump high-quality stocks that are near the end of a downturn and all set to move back up early in the New Year.
As a result of this impulsive tax-loss selling, stocks that have been weak tend to stay weak in the final month or two of the year. But the best of the bunch can make extraordinary recoveries when tax-loss selling season ends.
On the following pages, you’ll find our top 7 “tax-loss selling buys.”
LINAMAR CORP. $51.41 (Toronto symbol LNR; TSINetwork Rating: Average) makes a variety of automotive parts, including cylinder heads, cylinder blocks, camshafts, crankshafts and connecting rods. The company also makes self-propelled, elevating work platforms; it sells them under the Skyjack name.
The stock is down 31.2% from the start of 2016. That’s mainly due to falling sales of new cars. In addition, President-elect Donald Trump’s plan to renegotiate NAFTA could hurt Linamar, which has five plants in Mexico.
However, the company’s recent purchase of Montupet, a French maker of aluminum car parts, will help the company profit as automakers add more aluminum to their vehicles to comply with tougher fuel efficiency standards.
Linamar will probably earn $7.81 a share in 2016, and the stock trades at a low 6.6 times that estimate. The $0.40 dividend yields 0.8%.
Linamar is a tax-loss selling buy.
HOME CAPITAL GROUP INC. $28.40 (Toronto symbol HCG; TSINetwork Rating: Average) is a mortgage lender that serves borrowers who fail to meet the stricter standards of larger, traditional lenders such as Canada’s big banks.
The stock has declined 14% in the past year. That’s partly because Ottawa announced tougher standards for all mortgage lenders and borrowers. It now requires federally regulated lenders apply a new stress test for mortgage applications; that’s to see if borrowers can handle a future increase in interest rates.
The new rules could slow demand for mortgages, particularly in Toronto and Vancouver. However, Home Capital is in a stronger position to adapt than other non-bank lenders. That’s because it already does a good job keeping its credit risk down by identifying problem loans early and adjusting their repayment terms.
The company’s confidence prompted it to raise its quarterly dividend by 8.3%. The new annual rate of $1.04 a share yields 3.7%. The stock trades a low 7.1 times its likely 2016 earnings of $4.01 a share.
Home Capital Group is a tax-loss selling buy.
TRANSCONTINENTAL INC. $18.84, Toronto symbol TCL.A, is Canada’s leading printer of advertising flyers, magazines, newspapers and books. It also publishes weekly newspapers in Quebec and Atlantic Canada. More recently, the company has begun to make plastic packaging for food products.
The stock is down 12.0% in the past 12 months. That’s because Transcontinental is seeing weaker advertising revenue at its flyer and newspaper operations.
Even so, the company will benefit from its recent deal to print The Toronto Star. Its recent expansion into food packaging products also cuts its exposure to cyclical advertising markets.
Transcontinental probably earned $2.26 a share in the fiscal year ended October 31, 2016, and the stock trades at just 8.3 times that estimate. The $0.74 dividend seem safe, and yields 3.9%.
Transcontinental is a tax-loss selling buy.
DIEBOLD INC. $23.55 (New York symbol DBD; TSINetwork Rating: Average) recently completed its acquisition of German ATM (automated teller machine) maker Wincor Nixdorf AG, for $1.3 billion in cash and shares. The purchase makes the company the world’s largest maker of ATMs, with roughly 35% of the global market.
Expansion through acquisition adds risk. However, Wincor helps cut Diebold’s reliance on North America. As well, it lets the company expand into faster-growing areas such as payment-processing software and services. That should help to offset falling prices for ATMs and weaker demand as consumers do more of their banking on the Internet.
By eliminating overlapping operations, the combined company should raise its operating profit margin (operating profits as a percentage of revenue) from 4.8% in the latest quarter to over 9% by 2019.
Diebold’s shares are down 22% since the start of 2016. The new operations should push up earnings from $1.08 a share in 2016 to $1.69 in 2017. The stock trades at a reasonable 13.9 times the 2017 forecast. The $0.40 dividend yields 1.7%.
Diebold is a tax-loss selling buy.
WELLS FARGO & CO. $52.62 (New York symbol WFC; TSINetwork Rating: Average) is the second-largest U.S. bank, after J.P. Morgan Chase.
The stock is down 3% since the start of 2016. That’s partly because its employees opened 2 million unauthorized deposit accounts and credit cards. Those accounts helped them meet internal sales targets and qualify for bonuses. Wells Fargo has since fired the employees that falsified documents and has strengthened its internal oversight procedures.
The scandal forced the bank’s chairman and chief executive officer, John Stumpf, to retire this week. Tim Sloan, the chief operating officer, is the new CEO.
However, the likelihood of higher interest rates should raise Wells Fargo’s interest income in 2017. The bank also recently increased its quarterly dividend by 1.3%, to $0.38 a share from $0.375. The new annual rate of $1.52 yields 2.9%.
Wells Fargo should earn $4.04 a share this year, and the stock trades at a low 13.0 times that forecast.
Wells Fargo is a tax-loss selling buy.
BELLATRIX EXPLORATION LTD. $1.04 (Toronto symbol BXE; TSINetwork Rating: Speculative) produces natural gas (73% of output) and oil (27%) in Alberta, B.C. and Saskatchewan.
The stock has dropped 37% since the start of 2016, mainly because low oil and gas prices have hurt its cash flow. The company also recently sold 33.75 million of new common shares at $1.20 each. This will raise $40.5 million.
Existing shareholders are concerned the extra shares will dilute their interest. However, the company applied the total proceeds from the share sale—along with the cash from the sale of assets—to its debt. Bellatrix’s long-term debt now stands at $460.3 million (as of September 30, 2016), or 1.8 times its market cap.
As well, the recent rebound in natural gas prices should expand the company’s cash flow and let it continue to lower its debt.
Bellatrix is a tax-loss selling buy for aggressive investors.
AIMIA INC. $7.64 (Toronto symbol AIM; TSINetwork Rating: Extra Risk) owns and operates Aeroplan, Canada’s largest loyalty program. Over 5 million members collect Aeroplan miles from participating companies; they can then exchange them for flights, but also car rentals, hotel rooms and merchandise.
The stock is down 16% since the start of 2016.
However, Aimia continues to cut costs by closing offices and laying off employees. It has also hired advisors to look at selling non-essential assets such as its analytics business.
Meanwhile, the company’s results should improve with the economy, and any asset sales should protect its strong balance sheet and high dividend. Aimia raised that quarterly payment in June 2016 for the sixth straight year. It’s now $0.20 per share, up 5.3% from $0.19. The stock yields a high 10.5%.
Aimia is a tax-loss selling buy.
