Harvesting usually ramps up in the fourth quarter.
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Taxes don’t really have a season on Wall Street—and a host of stocks that have been on the losing side will be sold from now through the end of the year to trim bills from the IRS.
It’s called tax-loss selling, or “harvesting,” and here’s how it works: A portfolio manager sells an investment at a loss to offset the gains from other assets. A stock sold for a gain is taxed, but one sold at a loss isn’t, so incurring losses is how the portfolio manager lowers the overall amount of gains—and shrinks the portfolio’s tax bill.
Now, tax-loss selling is all about the here and now, not how to avoid higher capital gains taxes in the future. Investors, though, are keeping out an ear for what’s happening in Washington. The White House wants to raise the capital gains tax to 39.6% from 20% for those earnings more than $1 million annually. Strategists point out that a higher rate usually doesn’t affect the markets significantly one way or the other.
Many stocks could get oversold because of tax-loss selling—a good thing for investors. “We do see buying opportunities, as some tend to dump shares at attractive pricing towards the end of the year,” Dave Wagner, portfolio manager and analyst at Aptus Capital Advisors, told Barron’s.
Harvesting usually happens in the fourth quarter, in the run-up to the close of the tax year. And October is traditionally packed with sales, maybe because the month kicks off the quarter.
For the past 20 years, the stocks most vulnerable to tax-loss selling have performed roughly in line with the broader stock market in the fourth quarter but gained 1.3 percentage points less than the S&P 1,500 in October, a Morgan Stanley screen shows. The S&P 1,500, with a total market capitalization larger than the S&P 500’s, is the measure because it accounts for all large, midsize and small-cap companies in the U.S.
Morgan Stanley identified the tax-loss selling stocks as ones in the S&P 1,500 that fell 10% to 25% from mid-January through September. Those that lost more than 25% weren’t included because they probably will be bought by investors looking for cheap names, the bank said.
The list includes dozens of stocks in 17 subindustry groups, from software services, to manufacturing, to consumer goods and services.
The five worst performers all fell more than 23%. Here are their numbers: Matrix Service Company (MTRX), an engineering and construction services provider, 24.5%; Strategic Education (STRA), an education services company, 24.2%; Bel Fuse Inc. Class B (BELFB), a manufacturer of electronic circuits products, 24.1%; Pacira Biosciences (PCRX), a maker of pain-management products, 24%; and SailPoint Technologies (SAIL), a provider of enterprise identity governance solutions, 23.9%.
September and October have already been rough months for stocks. This is another challenge for the market.
Write to Jacob Sonenshine at [email protected]
