Increasing worries about how the new COVID-19 Omicron variant could threaten global economies have triggered wild stock market swings that may generate more tax-loss selling and better bargains for a potential Santa Claus rally.
Tax-loss harvesting – or selling securities at a loss to offset capital gains taxes – is a strategy that is now top of mind. Although investors have until Dec. 29 to sell losers to get a capital loss for 2021, they can’t buy the same security again for 30 days.
Some of the harder-hit stocks this year have been in the renewable energy, cannabis, and precious metals sectors.
However, uncertainty from the new variant and the U.S. Federal Reserve Board’s intent to speed up bond tapering could punish more stocks and exchange-traded funds (ETFs) in the near term.
“The opportunities may grow if the volatility increases,” says Daniel Straus, director of ETF research and strategy at National Bank Financial Inc. “And if you think that markets are going to continue to go down between now and the end of the year, then you would want to sell [for a tax loss] now.”
But advisors and investors who take advantage of tax-loss harvesting can buy other securities to maintain similar market exposure, says Mr. Straus, who recently released a report on tax-loss strategies using Canadian ETFs.
“If you’re one of those people who are attached to a name and would feel a certain regret on missing out on its [potential stronger] performance, even for a short time, then this is the path to follow.”
Renewable energy stocks had a huge bull run last year in anticipation of Joe Biden’s U.S. presidential victory and his ambitious climate change plan, but there has been a “mean reversion or falling back to earth” in this sector, he says.
How ETFs give exposure to sold off stocks
For example, shares of Ballard Power Systems Inc. BLDP-T are off sharply, but investors can still get exposure to the hydrogen fuel cell maker through its 9-per-cent weighting in Horizons Global Hydrogen Index ETF HYDR-T, Mr. Straus says.
Holders of Boralex Inc. BLX-T and Innergex Renewable Energy Inc. INE-T shares could cycle into BMO Equal Weight Utilities Index ETF ZUT-T, in which each stock has a 7-per-cent weighting, while Algonquin Power & Utilities Corp. AQN-T has a higher 9-per-cent position in iShares S&P/TSX Capped Utilities ETF XUT-T.
Canopy Growth Corp. WEED-T and Cronos Group Inc. CRON-T each have a 9-per-cent weighting in Horizons Marijuana Life Sciences ETF HMMJ-T, while holders of Centerra Gold Inc. CG-T might consider Harvest Global Gold Giants Index ETF HGGG-T, in which it has a 5-per-cent weighting, he adds.
“Whether tax-loss harvesting candidates are compelling or not is a very individual decision,” Mr. Straus says. “It depends on your entry point.”
Steve Palmer, president and chief investment officer of Toronto-based AlphaNorth Asset Management, says he is mainly looking for tax-loss selling candidates to add to names that are already in his small-cap, hedge fund.
It’s a strong time for junior stocks, he says. The S&P/TSX Venture Composite and predecessor indexes have been positive annually from Dec. 15 to Dec. 31 during the past 31 years with an annualized return of 5.3 per cent.
Although there are no guarantees, this index’s past returns during this period are indicative of the so-called Santa Claus rally phenomenon in which stock markets can often rise during the last two weeks of December into the new year.
“I make sure that I am fully invested long at this time,” says Mr. Palmer, who manages AlphaNorth Partners Fund. “I want to buy a company that makes business sense, trades at an attractive valuation, and whose fundamentals are positive.”
He recently bought shares of White Gold Corp. WGO-X, a junior gold miner whose stock is off sharply from $1.20 a share in August 2020.
“It recently put out good drilling results,” he says. “I have been buying below $1 a share.”
Emerge Commerce Ltd. ECOM-X, whose shares he acquired below $1, is also a candidate for tax-loss selling, Mr. Palmer says. This stock has declined steadily after a round of financing earlier this year when it offered warrants exercisable at $1.40 a share.
The e-commerce player, which is involved in categories that include pet products, premium meat, and golf, is still a compelling play because it has been growing revenue and executing on its business plan, he adds.
David MacNicol, president and portfolio manager at MacNicol & Associates Asset Management Inc., says his firm is now researching tax-loss opportunities that could produce a short-term profit in a potential Santa Claus rally.
“We typically buy [these stocks] around the last trading day of the year for the Canadian or U.S. market and sell them a month or two later once we’ve had a good gain,” he says. “If they have some further upside, we’ll sit on them.”
Look to commodities and U.S. stock picks
For the longer term, “some gold mining stocks are on my shopping list,” says Mr. MacNicol. Gold bullion GCZ21 has struggled because of competition from assets, such as bitcoin BTZ21, this year, but “I think you’ll start to see a bit of change in mindset if some mainstream cryptos start to falter.”
Agnico Eagle Mines Ltd. AEM-T is “one of our favourite large-caps” among potential tax-loss candidates, he says. The gold miner has full exposure to higher bullion prices because of its policy of not selling its future production forward while its mines are in safer jurisdictions such as Canada, Mexico, and Finland.
Gold miner B2Gold Corp. BTO-T, which operates mines in Mali, Namibia, and the Philippines, is “our second favourite,” he says. “The mines are not in as friendly places as Agnico’s, but we’re comfortable with that.”
He also likes Vaneck Junior Gold Miners ETF GDXJ-A, which provides exposure to 100 stocks. “If that [gold] market recovers – and it will at some point in time – this ETF will have the greatest leverage to recover quickly.”
Benjamin Gallander, co-founder and president of Contra the Heard investment newsletter, says he usually buys 75 to 80 per cent of his securities in December but targets stocks that can go up 100 per cent or more.
“The pond that I am looking at is smaller than normal” because of this year’s strong markets, says Mr. Gallander, a contrarian investor. “But, there could also be better opportunities from more volatile markets should Congress fail to raise or suspend the U.S. government’s debt limit by Dec. 15.”
Gold Resource Corp. GORO-A, whose stock has tumbled from his purchase price of US$2.66 a share in January, is a tax-loss candidate, he says. This U.S. gold and silver miner, which is acquiring Canada’s Aquila Resources Inc. AQA-T, is still attractive because it’s profitable, pays a dividend, and “has lots of potential upside.”
Another is Mobile TeleSystems Public Joint Stock Co. MBT-N, Russia’s largest mobile operator. He bought the stock at US$8.19 a share in April, but it has pulled back after rallying to more than US$10.
“It has a wonderful dividend yield of about 12 per cent,” he says. “The dividend varies every quarter so it probably will end up paying about 9 per cent.”
Still, investors need to be mindful that not all tax-loss candidates are going to be terrific bargains despite their slumping share prices, he warns.
“The danger is that you can catch a falling knife.”