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Big investors just finished their tax-loss selling. So it’s time to root through the wreckage to find bargains to buy.
This trade consistently works well because mutual funds and other large investors have to realize their tax losses by Oct. 31. After that, the stocks that they hammered tend to outperform.
By how much?
Since 1986, S&P 500
SPX,
stocks down more than 10% in the first 10 months of the year (the top tax-loss selling candidates) rose 5.6% over the subsequent three months, according to Bank of America. That’s 1.6 percentage point outperformance relative to the S&P 500’s average return of 3.9% during the same time.
After tax-loss selling, these stocks can get a boost from seasonally bullish market tailwinds. During Nov. 1 through Jan. 31, the S&P 500 has averaged 4.5% gains since 1936, compared with 2.9% for all other rolling three-month periods, says Bank of America.
Read: Biotechnology stocks have been tax-selling losers this year
Institutional investors have been big sellers of stock in recent weeks, and they’ve leaned heavily on their tax-loss selling candidates. To find the best bargains, Bank of America screened the S&P 500 for stocks with year-to-date (YTD) declines greater than 10%. Then the bank suggested clients consider the 13 it has buy ratings on. That list includes Global Payments
GPN,
Viatris
VTRS,
Incyte
INCY,
Qualcomm
QCOM,
and T-Mobile
TMUS,
Insider list
I’ll take a different approach. I’ll favor names that are down a lot where insiders were recently buying a meaningful amount of stock — based on my system of analyzing insider purchases at my stock letter Brush Up on Stocks. (You can find the link to my letter in the bio below.)
The significant insider buying suggests that business trends will support stock gains from early November and beyond. I recently suggested 22 of these names in my stock letter. Here are five to consider.
Intel
INTC,
; recent price: $48.25
Stock decline: -3.1% YTD; -29.5% from 2021 high
Latest insider purchase: 10/25/21
Yield: 2.9%
Intel stock cracked in late October even though the company posted decent results and beat estimates, thanks to sales strength in data centers, the so-called Internet of Things and Mobileye (self-driving cars). The problem: Intel announced aggressive capital spending that will hurt margins.
Personally, I like companies that invest in their future, especially when the news makes their shares cheaper. Insiders agree, given their large buying. The Intel stock decline this year means virtually anyone who bought in 2021 has a losing position. No doubt many of them were selling in late October to realize tax losses, compounding the stock weakness caused by the bullish capital-spending news.
MercadoLibre
MELI,
; recent price: $1,512
Stock decline: -7.8% YTD; -23.5% from 2021 high
Latest insider purchases: 8/18/21
Yield: None
This online retailer in Latin America is having a good year. Sales were up over 100% in the second quarter compared to the year before. Its user base grew 47% to 75.9 million shoppers. The stock has soared into the $1,800 to $2,000 range twice this year. But it’s been weak lately, along with a lot of large-cap tech. Anybody who bought the spikes this year was down quite a bit in late October and probably selling to reap tax losses.
But insiders are bullish, and why not? Online retail adoption is behind in Latin America, so it has plenty of growth ahead just to catch up with the rest of the world. It will catch up. The growth in distribution centers and last-mile hubs in Latin America supports the trend. The research group eMarketer says Latin America will post the fastest annual e-commerce sales growth in the world over the next several years — about 10 percentage points higher than the global average.
Krispy Kreme
DNUT,
; recent price: $12.86
Stock decline: -17.7% YTD; -38.9% from 2021 high
Latest insider purchases: 8/19/21 to 9/10/21
Yield: 1.1%
Krispy Kreme debuted as a stock again in early July in the $16 to $21 range. The stock now trades at $12.89, virtually at the all-time lows. This means any funds that purchased are underwater. Many of them were no doubt looking to realize tax losses.
But there are several reasons to be bullish. One is big buying by JAB Holding, a European company specializing in consumer-goods stocks. Next, Krispy Kreme’s growth is robust. It reported 23% organic sales growth in the second quarter.
Krispy Kreme has plenty of room to grow in several key U.S. markets where it is underrepresented, such as New York, Chicago, Boston and Minneapolis. It has room to grow in China, Brazil, and parts of Western Europe. It is also rolling out shelf-stable packaged products, and setting up more in-store display cases in grocery and convenience stores.
Lamb Weston
LW,
; recent price: $57.49
Stock decline: -25.9% YTD; -32.5% from 2021 high
Latest insider purchases: 10/11/21 through 10/20/21
Yield: 1.6%
If you order fries with your meal, the chances are you’re a customer of this company. Lamb Weston is a huge producer of frozen fries cooked up in restaurants. Based in Idaho (appropriately), this company sells to the top 100 restaurant chains in North America and overseas. McDonald’s
MCD,
is a big customer. You can find its products in grocery stores, too, under the Grown in Idaho and Alexia brands.
The company has been posting strong sales growth, but earnings have been hit by — you guessed it — inflation and supply-chain problems. It may take a few quarters, but these will turn out to be temporary problems.
Meanwhile, Lamb Weston has been raising prices on its products, and that too will offset the damage. It just takes some time. Another strength: Lamb Weston has a big presence in high-growth emerging markets.
New Fortress Energy
NFE,
; recent price: $30.56
Stock decline: -44.4%; -54.8% from 2021 high
Latest insider purchases: 8/19/21
Yield: 1.3%
I originally suggested this energy-infrastructure name to subscribers in my stock letter at $10-$11 in June 2019. We still have a triple in the shares despite the big declines this year. I think the stock is a buy in the current pullback.
New Fortress Energy buys natural gas in the U.S., freezes it into easily shippable liquid natural gas, and then sells to countries converting from dirtier diesel and heavy fuel oil — typically in the Caribbean and Latin America.
New Fortress Energy stock is down because of concerns about the rising cost of natural gas and the company’s large debt load. But natural gas prices will cool off after the winter heating season, and continued growth will help the company manage its debt levels.
Insiders sure think so. Execs with solid records recently bought $1 million worth of stock.
Remember that tax-loss-selling-rebound candidates can suffer another bout of weakness in late December, since retail investors must do their tax-loss selling by the end of the year. That’ll just be another opportunity to add to these companies.
Michael Brush is a columnist for MarketWatch. At the time of publication, Brush owned DNUT and NFE. Brush has suggested INCY, QCOM, INTC, MELI, DNUT, LW and NFE in his stock newsletter, Brush Up on Stocks. Follow him on Twitter @mbrushstocks.
