Winter is closing in and thoughts are turning to Christmas while visions of cash dance in the heads of Ebenezer Scrooges before bed.
It’s happy times for the Scrooges, um, make that investors, who are sitting on big profits this year. The S&P 500 is up 15.5 per cent from the start of January through to Dec. 10 (in U.S. dollar terms) while the S&P/TSX Composite climbed 7.3 per cent over the same period. Both figures include reinvested dividends.
Stocks are soaring despite the pandemic and it’s becoming apparent that easing from the central banks, and fiscal stimulus from governments, may have put a little too much rum in the market’s eggnog this year. On the other hand, rather too little was directed effectively to small businesses that were affected the most by the pandemic, in my view. The Cratchits suffered unduly, once again.
This year’s winners now face a dilemma. The lucky Scrooges with piles of capital gains fuelled by the manic market might want to lighten up on their high flyers before the eggnog runs out. But taxes can make the timing tricky. They can sell now and pay taxes this year, or wait and defer their taxes into the new year.
Most investors lean toward tax deferral in normal times. After all, paying later is usually better than paying early. As a result, stocks with big gains tend to weaken a bit in the early part of January when sellers hit the market.
But fortunes can change. 2020′s happy Scrooges might have to shell out more over the next few years because taxes are widely expected to rise to chip away at the government’s debt. Those who delay selling now might wind up paying more to the taxman in the future.
More positively, those who think the market will continue to party well into 2021 might look instead at the tax-related selling pressure as an opportunity to nibble on some of the year’s best performers should they weaken near the turn of the year.
The accompanying table highlights 20 candidates that sport the highest five-year total returns in the S&P/TSX Composite. It also shows total returns over the past year and past three months, along with price-to-sales and forward price-to-earnings ratios using average analyst earnings estimates for the next 12 months. The data comes from S&P Capital IQ.
The top gainers provided their shareholders with a good deal of cheer and total returns in excess of 300 per cent over the past five years.
Most of them gained more than 25 per cent over the past 12 months. But almost half of them lost ground over the past three months and that might indicate they’ve already peaked, which is why the table is sorted by three-month returns.
Bargain hunters will keep an eye out for firms with low price-to-sales and low P/E ratios in the list. After all, profitable firms trading at bargain prices that are trending higher can be attractive investments.
In the spirit of the season, it is important to point out that investors who are disposing of their shares can avoid capital gains taxes when they top up the poor box. That is, they can donate their publicly listed securities to Canadian charities and avoid paying capital gains tax in the process. You can learn more by reading Tim Cestnick’s recent article in The Globe and Mail on the topic, and by visiting CanadaHelps.org, which provides a useful primer. (The details should also be discussed with tax and financial advisers.)
When you’re in a charitable mood, visit the online version of this article and recommend a good Canadian charity, or two, for others to consider in the comments section. For what it’s worth, I recently donated to food banks.
I hope you make the best of what the holiday season has to offer this year. With a little luck 2021 will prove to be better than 2020 for both Scrooges and Cratchits alike.
Norman Rothery, PhD, CFA, is the founder of StingyInvestor.com.
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