Playing the Tax-Loss Bounce Back

Tax-loss harvesting is a popular investment strategy that allows investors to use investment losses to offset taxes on capital gains. Typically in the last quarter of the year, investors turn their attention to minimize the capital gains taxes they may have to pay the government at the end of the year. 2023 was a big year in the U.S. stock market and, for most long investors, very profitable. A side-effect of all those profits is a big tax bill.

Tax-loss harvesting involves selling investments at a loss to offset the amount of capital gains taxes owed from selling profitable assets. This strategy is commonly used to limit short-term capital gains, preserve the value of the investor's portfolio and reduce taxes. The process typically involves two steps: selling securities that have lost value and then using the capital loss to offset capital gains on other sales on the tax returns filed in the spring the following year. Tax-loss selling can create exaggerated price declines for stocks that have fallen in value throughout the year. These declines tend to reverse in January as selling pressure abates and investors see the profit potential with new eyes.

Herein I present seven companies I have selected using the Gurufocus All-in-One Screener that I think are good candidates for bouncing back from the conclusion of the tax-loss selling season. I focused on profitable mid to large-cap companies trading on the U.S. exchanges with negative three-month and year-to-date total returns. Theoretically, these companies are good candidates for bouncing back when tax-related selling pressure abates in the new year.

These seven stocks are briefly discussed below. (Note: you will need a subscription to GuruFocus to access the full screener. You can get a no-risk trial for GuruFocus by using the following referral link: https://www.gurufocus.com/?affid=a6c9d252cc9279741fed32062f2008fd)

Alibaba

Alibaba Group Holding Ltd. (BABA, Financial) is one of the largest Chinese technology and e-commerce companies. The GF Value chart shows it to be considerably undervalued. The stock was down 9.44% in the last three months and down 10.83% year to date. This would imply tax-loss selling.

Alibaba is currently below the initial public offeringprice of $92.70 set in September 2014. The stock has been a loser for the last four years, but it appears to be forming a long-term bottom. Revenue is still increasing and income is now rebounding. Note that the chart below is in log scale.

BABA Data by GuruFocus

Further, the valuation panel for Alibaba shows compelling value. It may be a bagain currently.

Overall, I think Alibaba is a good candidate for a rebound in early 2024.

Bristol-Myers Squibb

Bristol-Myers Squibb Co. (BMY, Financial) is one of the biggest global pharmaceutical companies. The company's earnings per share growth has faltered from the blistering high teens growth over the last few years as key products Revlimid, Eliquis and Opdivo, which account for over half its profits, currently face loss of exclusivity. This has caused the stock to fall over 26% for the year and over 10% for the quarter. The price-earnings ratio is only 6.88, which is much too low.

The market remains fixated on loss of exclusivity, but this issue is well-known at this point, yet the market undervalues key acquisitions the company has made in the past few years, particularly Celgene. The company continues to make new tuck-in acquisitions and has an excellent record of integrating them. LOEs are part of pharmaceutical life and it always amazes me when markets overreact to this expected event and overlook the fact that big pharma have become similar to movie studios who constantly bring new innovation via acquiring new technologies, scientific talent and smaller biotech companies. Bristol-Myers is very adept and accomplished at this game. You cannot always predict when another blockbuster will show up.

Thus I think the odds are good that in 2024 the market may start putting the focus on LOEs behind it and start focusing on the company's new innovations and pipeline. Bristol-Myers is currently trading at a depressed valuation compared to its 15-year median price-earnings and price-sales ratios.

BMY Data by GuruFocus

Franco-Nevada

Franco-Nevada Corp. (FNV, Financial) is the leading gold-focused royalty and streaming company that does not operate mines, develop projects or conduct exploration, but instead provides cash up front to miners in exchange for the right to buy gold, silver and other metals, thus building a large and diversified portfolio of royalties and streams. Recently, one of its large royalty streams got axed because the country of Panama moved to close down the Cobre Panama copper mine, which accounted for $223 million (about 17%) of revenue for the company in 2022. This has sent the stock down almost 17% in the last three months. This may be an overreaction as it is likely the mine may be reopened after a period of renegotiations as the country's economy is unlikely to be able to withstand business and legal pressures. The matter is currently in international arbitration, which is likely to result in substantial damages payable by Panama to First Quantum, the operator of the mine (a portion of which will then be due to Franco-Nevada.)

The company is likely to get over this setback, which is part and parcel of the business it is in, and get back on track. Franco-Nevada has been a phenomenal performer and the stock is up 1,100% over the last 20 years.

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Humana

Humana Inc. (HUM, Financial) is an employee health maintenance organization that offers health care benefits to employers and other direct members, operating as a for-profit health insurance company based in the United States. The stock is down about 6% in the last quarter because Cigna and Humana were in talks about a potential merger, which would have seen Cigna acquire Humana in a cash-and-stock deal, creating a $140 billion industry giant. However, the talks were put on ice and eventually ended amid concern from investors and an inability to pin down key financial terms.

This uncertainty and possibly tax selling pressure has temporarily affected the stock price, so I think now is a good opportunity to grab this epic performer, which has compounded at the rate of 16.59% over the last 10 years. While Humana is only modestly undervalued, this should balance out by the past high predictability of its earnings and steadiness of its share price incline.

Paycom

Paycom Software Inc. (PAYC, Financial) is a fast-growing provider of payroll and human capital management software, primarily serving small to mid-size companies within the U.S. Alongside its core payroll software, Paycom offers various add-on modules, including time and attendance, talent management and benefits administration. The stock rose rapidly during the pandemic, but has since deflated 33% for the year and is now around the pandemic lows of March 2020. This is overly pessimistic and I expect 2024 will be a lot better. Software provided by Paycom is highly "sticky" as, once adopted, it is very difficult to replace as it becomes embedded in the core company processes.

PAYC Data by GuruFocus

Pfizer

Pfizer Inc. (PFE, Financial) is one of the largest drug companies in the world. The stock is down about 41% for the year and 9% for the quarter. Pfizer is a victim of its own success during the pandemic and is suffering because the extraordinary sales gains due to its Covid vaccines and drugs have reversed with a vengeance in 2023.

In spite of the sales declines, Pfizer's stock looks undervalued when judged against 15-year median price-earnings and price-sales ratios. I think the stock is a poster child for a bounce back in 2024.

Yum China

Yum China Holdings Inc. (YUMC, Financial) is China's largest fast-food restaurant company, operating and managing several chains, including KFC, Pizza Hut, Taco Bell and other emerging brands. Yum China is not owned by Yum Brands (YUM, Financial), the U.S.-based company that owns the KFC, Pizza Hut, and Taco Bell brands. Yum China became an independent publicly traded company on Nov. 1, 2016 and is listed on the New York Stock Exchange and the Hong Kong Stock Exchange.

The company operates 8,484 restaurants in over 1,100 cities located in every province and autonomous region in China. The company has been experiencing significant growth, with plans to open up to 1,300 stores in the near future. The company has a long runway ahead of it as Chinese consumption of fast food is much below the West and the Chinese population is rapidly acquiring the taste for fast food.

Yum China's stock is down about 24% this quarter due to China's economy faltering and consumers pulling back. However, I think the pullback is overdone and I expect the stock to bounce back in 2024 when it becomes clear the secular long-term growth story for the company is intact. Morningstar rates the stock as 5-star with a fair value of $80.

Conclusion

A tax-loss bounce back strategy seeks to take short-term advantage of the snap back of stocks that were sold off due to tax-loss selling. While I expect these stocks to bounce back in the short term in 2024, all of them are long-term buys with strong fundamentals. Even if the rebound does not work out in the short term, they should so well long term as they are all undervalued and should revert to intrinsic value eventually.

I hope this analysis gave you some food for thought.