By Michael Brush, MarketWatch
Like retailers, the stock market runs a lot of sales this time of year, so let’s go shopping.
Each year around this time, investors dump their dogs to generate losses so they can offset gains and lower tax bills.
But not everything they sell is garbage. If you stick to promising companies with solid balance sheets and pay a dividend, or are buying back a lot of stock, you can take advantage of the selling to pick up bargains.
This year, tax-loss selling is particularly pronounced and probably creating more bargains than normal because of an unusual dynamic. Many investors took profits earlier in the year when the market was strong. Now they face a tax bill, even though their stock portfolios have done poorly overall in 2015.
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That doesn’t sit right. So investors are working harder than normal to realize tax losses, according to John Buckingham, editor of the Prudent Speculator stock newsletter. “There is a lot more incentive for tax-loss selling when your overall portfolio is down or flat and you have a giant tax bill,” says Buckingham who also manages the Al Frank Fund . “People are thinking, ‘I don’t want to pay taxes when I have a loss on my portfolio.’”
To round up some great tax loss selling candidates that these investors are dumping, I tapped the expertise of Buckingham and three other fund managers. Let’s take a look.
1. Tap the energy sector
Energy stocks have been such lousy performers this year, they are ground zero for tax-loss selling. Admittedly, predicting the price of oil is tough. But eventually enough supply will be destroyed by low prices, as per Saudi Arabia’s plan, that oil prices will rebound. So it makes sense to pick up quality energy companies getting battered right now.
Jeanie Wyatt of South Texas Money Management likes Occidental Petroleum Corp. /zigman2/quotes/207018272/composite OXY -2.63% , in part because it cut capital spending early after signs of trouble surfaced in the oil patch, to protect its strong balance sheet. Now it has the wherewithal to pick up quality assets at sale prices, as some of its peers are forced into bankruptcy, Wyatt observes. “Management has a demonstrated ability to work through difficult cycles like this,” she adds. The stock recently sported a 4.5% dividend yield.
Buckingham likes oilfield services company National Oilwell Varco Inc. /zigman2/quotes/208758290/composite NOV -1.85% . “This is a high quality name with a strong balance and great credit rating and a lot of respect from financial community,” Buckingham notes. “They are going to be able to make acquisitions during this horrendous period, and weather the storm and emerge stronger.” National Oilwell Varco sells for less than book value, and its stock has a 4.6% dividend yield.
Buckingham also suggests a retailer as a play on energy sector weakness, because so many of its stores are in oil states like Texas and Louisiana. Shares of Stage Stores Inc. have been crushed since August on weak earnings results. “They’ve been hurt because their customers have been hurt,” Buckingham says. The company is priced at around half of book value. The stock has a 7.6% dividend yield, which the company claims is secure. Stage Stores has also announced a big share buyback program under which the company could potentially repurchase as much as 40% of its stock, Buckingham says.
2. Shop unloved retailers
Retailers have also been hit hard recently, as investors worry about weak apparel sales, the economy’s health in a rising interest-rate climate, and competition from behemoth Amazon.com Inc. /zigman2/quotes/210331248/composite AMZN -4.41% .
In the weakness, compounded now by tax-loss selling, Wyatt of South Texas Money Management recommends shares of Nordstrom Inc. /zigman2/quotes/203902116/composite JWN -1.32% , a quality retailer known for its superior customer service, that got punished in mid-November when it missed estimates. “Nordstrom is well positioned to recover quickly once industry trends normalize,” Wyatt says. Meanwhile, the company has a big stock buyback plan in place, and pays a 2.7% dividend. Nordstrom is also expanding in Canada.