- Tax-loss harvesting is a popular investing strategy at this time of year.
- Losing stocks have historically rebounded strongly after mutual funds cut losses.
- Here are 28 lagging stocks that could see big gains, according to Bank of America.
No investing strategy — no matter how promising — is foolproof.
However, history teaches that there is a tactic that has a perfect 100% track record of success when the S&P 500 is down through October, according to Bank of America: buying stocks that are tax-loss harvesting candidates.
Tax-loss harvesting is an investing strategy used to make stock market losses less painful. In this strategy, investors sell stocks that are down and appear unlikely to rebound at a loss. Those losses can then be used to offset the capital gains tax that they’ll pay whenever they log a gain by selling a winning stock.
In short, by cutting bait on losers, investors free up money and save on taxes.
For example, if an investor made a misplaced bet on a once-high-flying growth stock that sunk this year, but scored a win on an energy stock, he could reduce his capital gains tax by up to $3,000 per year by selling the growth stock at a loss and booking a gain from his position in the energy stock.
Why buying losers will be a winning strategy
The seasonal practice of tax-loss harvesting will likely be more popular than usual this year, given that more than two thirds of the stocks on the S&P 500 are down by over 10% in 2022, wrote Savita Subramanian, the head of US equity strategy at Bank of America, in an October 6 note.
Losses for the market’s biggest laggards could get worse ahead of the October 31 deadline for mutual funds to register capital gains. The cutoff point for individual investors is December 31.
But Subramanian noted that those outflows from losers tend to turn into inflows from November through January, meaning that there’s “a higher potential for a bigger subsequent bounce in these stocks following the selling,” the strategy head wrote.
Since 1986, stocks that were down at least 10% for the year through October outpaced the S&P 500 69% of the time in the three months from November through January, beating the index by an average of 1.8 percentage points, Subramanian wrote. That’s especially impressive when considering that the index typically logs an above-average gain of 4.5% in that stretch.
And during years when the S&P 500’s returns are negative through October, tax-loss harvesting candidates outperform 100% of the time from November through January by an average of 8.2 percentage points, Subramanian wrote.
28 beaten-down buy-rated stocks that could bounce back
Bank of America recently identified 159 buy-rated stocks that are tax-loss harvesting candidates and could be set to rebound from November through January. Each was down at least 10% in 2022 as of October 5 and “may be temporarily depressed by tax loss harvesting but could outperform in subsequent months on solid fundamentals,” Subramanian wrote.
Insider narrowed the list down to 28 names that were down at least 40% year-to-date as of October 5. Those stocks are below, along with the ticker, market capitalization, sector, and year-to-date return through October 5 for each.
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