For a blockbuster year in the Canadian stock market, there are a curious number of big losers in the benchmark index.
Roughly 17 per cent of the companies in the S&P/TSX Composite Index are down by at least 10 per cent year to date, while 9 per cent are down by 20 per cent or more.
It’s a different story in the United States, where 7 per cent of the companies in the S&P 500 index have posted double-digit losses on the year, and just 3 per cent are sporting a 20-per-cent decline.
That’s an unusually large discrepancy between the two markets, especially considering they have more or less moved in lockstep this year.
One possible explanation: With inflationary pressures building, the market’s preferences have shifted toward the largest companies on the exchange, which typically have a greater ability to pass rising prices onto consumers, said Jason Mann, chief investment officer at Toronto-based EdgeHill Partners.
“If you look back at other periods of inflation, small caps actually don’t do very well as a group, and it’s because they lack pricing power,” Mr. Mann said.
And since the Toronto Stock Exchange features small-cap stocks in abundance, there is a relatively large group of dismal performers at the bottom of the market. They just aren’t big enough to drag down the entire index.
The average index investor in Canada has done very well this year, with the S&P/TSX Composite Index up by 23 per cent so far.
Those gains have been driven by size – the big banks, the big energy companies, and the big names such as Shopify Inc., which has soared by 50 per cent as it has become a global e-commerce behemoth with a market capitalization of nearly $270-billion.
The S&P/TSX Equal Weight Diversified Banks Index is up by 34 per cent on the year, while large oil and gas names such as Suncor Energy Inc., Cenovus Energy Inc. and Canadian Natural Resources Ltd. are up by between 50 per cent and 100 per cent.
“Canadian investors have lots of gains to protect,” said James Hodgins, an analyst at Stifel Nicolaus Canada.
Helpfully, there is a large pool of laggards that investors should be looking at for targets for tax-loss selling, Mr. Hodgins said. This common practice involves unloading slumping names in order to claim a loss and offset gains in other parts of one’s portfolio.
In looking at this year’s biggest losers in the S&P/TSX Composite Index, some themes jump out.
The small-cap space has produced more than its share of losses this year, aside from the energy sector, which has benefited from a huge run in oil prices, with a barrel of West Texas Intermediate currently priced at about US$76.
The 60-odd stocks in negative territory on the year have an average market cap of about $5.5-billion – well below the index average of more than $15-billion.
Precious metals names are well represented, which is typical of a rising-rate environment. Of the 20 worst performing stocks in the Composite, half of them are gold and silver miners.
It’s also been a terrible year for cannabis producers, which are struggling to grow in an oversaturated market. Canopy Growth Corp., for example, is down by 50 per cent on the year. With the industry’s business model in question, cannabis stocks are ripe for tax-loss selling, Mr. Mann said.
“With a speculative investment like that, there’s no backstop,” he said. “People are happy to sell those.”
The popularity of unloading stocks as a tax manoeuvre means the market generally continues to punish the year’s worst performers, right up until the end of the year.
“There will be steady pressure until the last day of tax-loss selling,” Mr. Mann said. “That typically sets up the January effect, where those very same stocks get a bit of a bounce.”
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