Every year, investors sell losing stocks in their portfolio to offset their winners in order to reduce capital gains taxes.
That sets up an opportunity to create a portfolio of stocks that are likely to rebound after the start of the new year, Real Money’s Jonathan Heller notes.
In an update on the 2021 Tax Loss Selling Recovery Portfolio, Heller said that while the portfolio is down about 4.5% over the past month, it still has performed relatively well since inception, up about 49%.
“The portfolio is on its last legs, however, and will be retired by November as I begin to put together next year's vintage,” Heller said in a recent Real Money column. “Pickings for the new version are slim at this point, but a lot can change between now and the intended December roll-out.”
The Tax Loss Portfolio has a straightforward premise – it’s goal is to pinpoint potentially inexpensive securities that have fallen sharply during the year and might be pushed even lower at the end of this year as investors harvest losses.
To be considered, Heller looks for stocks that are down at least 30% year to date, with forward price-to-earnings (P/E) ratios below 15 in the next two fiscal years and with a minimum market cap of $100 million.
“The theory is that these names may rebound in the New Year when the selling pressure is off, and so far that has been the case in 2021,” Heller noted.
The big winners in this year's portfolio include Wells Fargo (WFC) - Get Wells Fargo & Company Report, up 60% since inception; Pilgrim's Pride (PPC) - Get Pilgrim's Pride Corporation Report, up 45% and Sally Beauty Holdings (SBH) - Get Sally Beauty Holdings, Inc. Report, up 36%.