Many investors with non-registered accounts sell losing stocks at year-end to claim capital losses for tax purposes. This selling pressure can turn cheap stocks into even greater bargains, making November and December a busy time for some value and contrarian investors.
One of the busy investors is Benj Gallander, co-editor of the Contra the Heard investment letter and a regular contributor, with Ben Stadelmann, to The Globe and Mail. In his book, The Contrarian Investor’s 13, Mr. Gallander says he looks to buy most of his stocks during the tax-loss selling season in December. (His President’s Portfolio in the investment letter reports an average annual return of 18.1 per cent for the past 20 years.)
There may not be many stocks in the red as 2021 comes to an end but that won’t stop Mr. Gallander. “Investors will still want to create capital losses because of the sizable capital gains this year,” he said in an interview. “The selling could occur just in the few stocks that are down a lot – so they could see some significant price weakness.”
Where might value opportunities arise from tax-loss selling in 2021?
Let’s narrow down the search to companies near or above a $1-billion market capitalization, to reduce the risk of buying into a delisting. Next, let’s screen for stocks that have fallen by at least 10 per cent since January or are trading near a 52-week low. Then select the ones with consensus buy recommendations from analysts tracked by Zacks Investment Research.
The search resulted in seven stocks, shown in the accompanying table.
What stands out is the large representation of gold miners. Three of them are on the table: Yamana Gold Inc., B2Gold Corp. and Barrick Gold Corp. Can they rebound? There are some reasons to believe so.
First, current consolidation in the industry could result in more companies taken over at higher prices and becoming part of stronger entities. Second, if governments move to regulate and tax cryptocurrencies, gold will have less of a rival as a haven asset. Third, higher inflation, negative real interest rates and attractive equity valuations will promote “capital rotation into the gold space,” writes analyst Tanya Jakusconek, of Scotia Capital, in a research note.
Real Matters Inc. operates a technology and networking platform that provides title-search and appraisal services to the mortgage-lending and insurance industries, mainly in the United States. Its stock could surprise on the upside if fears of rising interest rates prove to be overdone, and the reorganization of the company’s title-search business is completed successfully.
Martinrea International Inc. makes metal and other parts for vehicle manufacturers. What could turn things around is a winding down of launch costs for new products and an end to the chip shortage currently crimping automobile production. “We continue to believe that benefits from ongoing operational improvement efforts will be realized over the medium to long-term,” Michael Glen, an analyst at Raymond James, said in a note.
Algonquin Power & Utilities Corp. provides renewable energy through wind, solar and hydroelectric facilities. In a Nov. 15 note, TD Securities analysts Sean Steuart and John Mould said that Algonquin Power “offers a compelling valuation in the context of an extensive growth pipeline that includes organic development activity, potential acquisitions, and utility rate-base investments.”
Mr. Steuart and Mr. Mould are also bullish on Northland Power Inc., a producer of renewable energy specialized in offshore wind production. “Northland’s 2021 guidance is intact, and the company is advancing numerous development initiatives,” they note.
Larry MacDonald blogs at https://larrymacdon.substack.com
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