The tax-loss selling of large investors is over. It's time to dig through the wreckage and find bargains to purchase.
Because mutual funds and large investors must realize their tax losses by Oct. 31, this trade is consistent. The stocks they hit tend to outperform.
How much?
According to Bank of America, S&P 500 SPX +0.37% stocks fell more than 10% over the first 10 months of 1986 (the top tax-loss sellers candidates). However, they rose 5.6% in the three subsequent months. This is a 1.6 percentage point performance relative to the S&P500's average return of 3.9% over the same period.
These stocks may benefit from seasonal bullish market tailwinds after they have been sold to the tax-loss. According to Bank of America, the S&P 500 experienced 4.5% growth from Nov. 1 to Jan. 31, compared with 2.9% in all three-month rolling periods.
Read more: Biotechnology stocks are tax-selling losers in this year's tax reform
In recent weeks, institutional investors have been major sellers of stock and heavily relied on tax-loss selling candidates. Bank of America screened S&P 500 stocks for stock declines greater that 10% in order to find the best bargains. The bank recommended that clients look at the 13 stocks it has buy ratings. This list includes Global Payments GPN (+0.83% ), Viatris VTRS +0.37% ; Incyte INCY +0.55% ; Qualcomm QCOM +4.43% ; and T-Mobile TMUS +0.02%.
Insider list
I will take a different approach. Names that are very low will be preferred. This is based on my analysis of insider purchases in my stock letter Brush up on Stocks. You can find the link in the bio to my letter.
Insider buying is a sign that stock gains will be supported by business trends starting in November. In my stock letter, I suggested 22 of these names. These are just five ideas.
Intel INTC, +1.21%; latest price: $48.25
Stock fall: -3.1% YTD, -29.5% starting at 2021 high
The latest insider purchase: 10/25/21
Yield: 2.9%
Despite posting decent results and beating estimates, Intel stock fell in October. This was due to strong sales in data centers and the so-called Internet of Things. Problem: Intel announced aggressive capital expenditures that will impact margins.
Personally, I love companies that invest in the future of their company, especially when shares are less expensive. Because of their large purchases, insiders are in agreement. This year's decline in Intel stock prices means that virtually everyone who bought Intel stock in 2021 is now in a losing position. Many of them sold their shares in October to cover tax losses. This compounded the stock weakness that was caused by bullish capital-spending news.
MercadoLibre MELI, +4.71% ; recent price: $1,512
Stock decline: -7.8% YoTD; -23.5% starting at 2021 high
The latest insider purchase: 8/18/21
Yield:
This Latin American online retailer is enjoying a great year. The second quarter saw sales rise by more than 100% compared to the previous year. The company's user base increased 47% to reach 75.9 millions. This stock has shot up to the $1,800-$2,000 range twice in this year. It has been weak recently, as have many large-cap tech companies. Anyone who bought spikes this year saw a drop in October, and most likely sold to take advantage of tax losses.
Insiders, however, are optimistic. Latin America is slowing down in online retail adoption. It has plenty of growth potential to catch up with the rest. It will catch up. This trend is supported by the growth of distribution centers and last mile hubs in Latin America. According to eMarketer, Latin America will experience the fastest annual ecommerce sales growth over the next few years. This is approximately 10 percentage points more than the global average.
Krispy Kreme DNUT, +1.73% ; recent price: $12.86
Stock decline: -17.7% YoTD; -38.9% starting at 2021 high
The latest insider purchases: 8/19/21 - 9/10/21
Yield: 1.1%
Krispy Kreme was reintroduced as a stock in July at $16 to $21. The stock trades at $12.89 and is now at its lowest level. All funds purchased are now underwater. They were most likely looking to make tax losses.
There are many reasons to be bullish. JAB Holding, an European company that specializes in stocks of consumer goods, is one reason to be bullish. Krispy Kremes's growth is strong. It saw 23% organic growth in its second quarter.
Krispy Kreme can grow in key U.S. markets, including New York, Chicago and Boston, where it is not well-recognized. It can expand in China, Brazil, as well as parts of Western Europe. It's also launching shelf-stable packaged goods and putting up more display cases in grocery stores and convenience stores.
Lamb Weston LW (+2.69%); recent price: $57.49
Stock decline: -25.9% YoTD; -32.5% starting at 2021 high
The latest insider purchases are from 10/11/21 to 10/20/21
Yield: 1.6%
Chances are, you're a customer of this company if you order fries along with your meal. Lamb Weston is a large producer of frozen fries that can be used in restaurants. This company is based in Idaho. It sells to over 100 restaurants in North America and abroad. McDonalds MCD +0.49% is a major customer. Its products can also be found in grocery stores under the Alexia and Grown in Idaho brands.
The company has seen strong sales growth but its earnings have been affected by inflation and supply chain problems. These problems will be temporary, even though it may take several quarters.
Lamb Weston, which has been increasing prices for its products, is also doing so to offset the damage. It takes time. Lamb Weston is also a strong presence in emerging markets with high growth.
New Fortress Energy NFE -2.69%; current price: $30.56
Stock decline: -44.4%, -54.8% starting at 2021 high
The latest insider purchase: 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. Despite the huge declines in shares this year, we still have a triple of the shares. The stock is worth a buy despite the recent pullback.
New Fortress Energy purchases natural gas from the U.S. and freezes it to make liquid natural gas that can be shipped. This is then sold to countries that convert from diesel or heavy fuel oil, which are common in the Caribbean and Latin America.
New Fortress Energy shares are down due to concerns about rising natural gas prices and its large debt load. However, natural gas prices will drop after winter heating season and the company's debt levels will be managed by continued growth.
According to insiders, they believe so. Stock was purchased by $1 million-worth of executives recently by solid record holders.
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. This will be another chance to increase the value of these companies.
MarketWatch columnist Michael Brush. Brush was the owner of NFE and DNUT at the time of publication. Brush suggested INCY and QCOM as well as INTC, INTC, MELI (DNUT), LW, NFE, and MELI in Brush's stock newsletter, Brush up on Stocks. Follow him @mbrushstocks.
