In an annual year-end ritual, investors have dumped many of their stock losers to offset taxable gains. This so-called “tax loss selling” can create buying opportunities in promising names. These stocks have been unduly punished by this temporary pressure, and can rebound in January as the pressure eases.
People who bought “Magnificent Seven” names like Nvidia
early in 2023 could have some serious profits to offset when they sell. At the same time, there are many tax loss selling candidates to choose from since so much of the broad market was weak. “A rising tide did not lift all boats,” notes John Buckingham of the Prudent Speculator investment letter. “Until recently, the average stock was down for the year.”
Here’s a diverse mix of 10 stocks, spread across industry sectors and market-cap size — from megacap monsters to the single-digit midgets (stocks under $10). These small fry are more prone to attractive stock declines when tax loss selling hits because they have lower liquidity.
Three mega caps
1. Pfizer (PFE): Shares of this biopharma giant have not traded this low since 2013. That makes Pfizer
a prime candidate for tax loss selling.
Pfizer stock is down because of its post-Covid-19 hangover. Not only have Covid therapy sales suffered, but the company has to repay the U.S. government for doses it decided not to buy. “Pfizer results have been terrible relative to where they were,” Buckingham says. “The Covid bust has been worse than people expected. If you are looking for a tax loss stock that everyone is dumping, it would be Pfizer.”
But the Pfizer investment thesis is intact. Buckingham expects earnings to improve during 2024-26 as it rolls out new products and the government givebacks go away. Even if results do not improve, investors may still do well. “People overly punish stocks,” Buckingham says. “You can get a substantial rebound in a stock just because things don’t get worse.”
2. Exxon Mobil (XOM) Exxon Mobil
may be a blue-chip energy company, but you wouldn’t know it from the stock price. Exxon shares traded as high as $120 in 2023, compared to $100 earlier this week. So, a lot of buyers are sitting on losses they’ve booked against market gains.
Exxon shares lag this year in part because oil prices have collapsed. West Texas Intermediate crude
has fallen to the low $70 range per barrel from above $90. But that won’t last forever. Oil companies have underinvested in development for years. So, when the economies in Europe and China bounce back, oil demand and prices will firm up.
Exxon stands ready to benefit for three reasons, says Todd Lowenstein, a portfolio manager at U.S. Bank.
First, it is a low-cost producer. Next, Exxon is bolstering its position in U.S. shale with the purchase of Pioneer Natural Resources
“This is a game changer in terms of the U.S. footprint,” says Lowenstein. Exxon also has a big stake in Guyanese oil fields, which Lowenstein describes as one of the biggest finds in a long time. “Exxon looks cheap compared to its growth, intrinsic value and the market,” he says. You get paid to wait for sentiment to turn on energy and Exxon. The stock recently had a 3.8% dividend yield.
3. International Flavors & Fragrances (
): Shares of this flavors, fragrances, and cosmetics company are down in 2023. So, more than a few holders are selling to book losses to offset gains elsewhere.
The shares are down in part because the company’s purchase of the nutrition and food ingredients division of DuPont de Nemours
in 2021 is not going well so far. But mergers take time to show benefits. Lowenstein at U.S. Bank says this one will still work out, citing company plans to sell non-core assets to reduce debt and cost cutting. At a recent price of around $82 a share, the company offers a 4% dividend yield.
An activist play
Mercury Systems (MRCY): This company sells displays, signal solutions, and networking and storage devices used in aerospace and defense. Because of weak results, most people who bought shares of Mercury Systems
this year are under water. Tax loss selling could be creating a bargain.
In response to the share weakness activist investor Jana Partners recently added $8.6 million worth of stock to its large position. A director bought about $1.2 million worth. Jana was already the top shareholder with a 15.8% position. Jana has been winning board seats, and it has talked about trying to orchestrate a sale. That has not gone well so far, but the additional purchase suggests Jana thinks it might make some progress soon.
Cannabis stocks: The cannabis sector had another bad year in 2023. A lot of investors are sitting on losses they can book to offset gains. This is no doubt suppressing cannabis stocks — creating an opportunity.
Next year could be a turning point for the sector. The Biden administration is serious about rescheduling cannabis under the Controlled Substances Act. Moving cannabis from Schedule I (where it is ranked with heroin and above fentanyl) to Schedule III would help cannabis companies by essentially decriminalizing marijuana — improving the companies’ access to banks and bringing in institutional investors.
Rescheduling is likely next year. U.S. President Joe Biden needs a victory in cannabis to woo younger voters. What’s more, big states like Pennsylvania and Florida may legalize recreational use over the next two years.
For ETFs, consider AdvisorShares Pure US Cannabis ETF
Stocks include Green Thumb Industries
) and Trulieve Cannabis
Green Thumb is the blue-chip operator in cannabis. Curaleaf offers exposure to potential U.S. growth markets, and it is wisely positioning in Europe ahead of probable decriminalization. Trulieve provides exposure to Florida. That would be one of the biggest markets if voters approve a proposed recreational-use legalization referendum in the 2024 election.
Cutera (CUTR): This small company sells laser and ultrasound devices used in cosmetic treatments like body contouring, and lesion and tattoo removal. Cutera
stock is down more than 90% this year in part because it badly marketed an effective acne treatment device called AviClear, says Steven Schuster, a value manager Bridge Street Asset Management. The company distributed the device to dermatologists at no upfront cost, in exchange for a revenue split. But about 40% of the recipients did not use the devices in the third quarter. “Doctors had no skin in the game so it failed,” says Schuster. “This burned cash.”
Now Cutera is taking back the devices. It expects half of them to be returned and plans to sell them rather than give them away. “They are going to go from burning cash to generating cash in the second- or third quarter of 2024,” Schuster says. Signs of progress along the way should attract interest in the stock. CEO Taylor Harris, who took over last summer, has a record of putting companies up for sale. That may be the endgame here.
Michael Brush is a columnist for MarketWatch. At the time of publication, he owned NVDA, MSFT, TSLA, GOOGL, XOM, MSOS and MSOX. Brush has suggested NVDA, MSFT, TSLA, GOOGL, PFE, XOM, MRCY, MSOS, MSOX and CUTR in his stock newsletter, Brush Up on Stocks. Follow him on X @mbrushstocks