What are we looking for?
Candidates for tax-loss harvesting.
The screen
As we close in on the end of a rather spectacular but volatile year in Canadian equities, tactical retail investors may be looking at tax-loss harvesting. Essentially, this describes the end-of-year selling of a stock that has experienced a loss. By realizing – or "harvesting" – that loss, investors can offset taxes on both gains and income.
Today, I look for candidates for this type of trade within the S&P/TSX composite index. Specifically, I first ranked stocks on their month-to-date total return, and in today's strategy, the more negative the better. However, to qualify for the screen, one (or more) of the following conditions must be met:
- Earnings variability (a measure of how consistent a stock’s reported earnings have been over time – lower figures preferred) must be better than the median in the S&P/TSX composite, which today is 12.4.
- Three-month estimate revision (today’s consensus earnings per share versus the same figure three months ago, higher figures preferred) must be better than the median in the S&P/TSX composite. Today, that figure is minus 0.6 per cent.
- Five year EPS annualized growth rate must be better than the median in the S&P/TSX composite. Today, that figure is 5.86 per cent.
The idea here is that we scan our portfolio for positions with net losses in the month of December, yet still have one of the three fundamental characteristics (consistency, Street sentiment, medium-term historical growth) for potential future gains.
More about Morningstar
Morningstar Research Inc. provides independent investment research in North America, Europe, Australia and Asia. Its research tool, Morningstar CPMS, provides quantitative North American equity research and portfolio analysis to institutional clients and financial advisers. CPMS data cover more than 95 per cent of the investable North American stock market. With more than 110 equity and credit analysts, Morningstar has one of the largest independent institutional equity research teams in the world.
What we found
The top of the list is dominated by materials and energy names showing some of the larger losses in December, with names from other sectors showing less dramatic drops in the month. As always, investors are encouraged to conduct their own independent research before purchasing or selling any of the investments listed here.
Ian Tam, CFA, is a relationship manager for CPMS at Morningstar Research Inc.