This is a bad time to buy on the bounce.
Energy stocks and domestic retail stocks have bounced back from a horrendous 2017 in recent days thanks to the prospect of corporate tax reform. But investors need to be careful buying the bounce in many of these troubled companies, especially at this time of year. Investors often dump some of the worst-performing stocks in their portfolios toward the end of the year to offset some of their capital gains for tax purposes. In particularly strong years like 2017, tax-loss sellers have few options. Buyers beware of these 10 tax-loss candidates in December.
After another horrible 54 percent decline in 2017, Under Armour is a prime candidate for tax-loss selling. The athletic apparel industry has been under pressure this year thanks to the bankruptcy of Sports Authority and struggles at other brick-and mortar retailers. Investors looking to dial back their exposure to athletic apparel will get no tax relief by selling Nike (NKE), which is up 18 percent this year. However, with Under Armour trading near multi-year lows, many of its shareholders are deeply underwater.
J.C. Penney Co. (JCP)
J.C. Penney stock has some positive short-term momentum after the company reported a third-quarter earnings beat in November. Unfortunately, the big gain comes after the stock dipped below $3 per share this year, its lowest level in decades. JCP’s turnaround efforts may be showing early signs of progress, but the company still has a long way to go to pull out of its long-term nosedive. Even after the recent rally, the stock is down 59 percent in 2017 and more than 80 percent in the past five years.
Sears Holdings Corp. (SHLD)
While the stocks on this list are selected based on poor 2017 performance only, stocks like Sears have poor long-term investment prospects regardless of whether they endure stock-loss selling in the final weeks of the year. Like J.C. Penney, Sears stock rallied after it beat basement-level earnings expectations in the third quarter. But even after closing another 400-plus stores in 2017, the company reported a 15.3 percent decline in same-store sales for the quarter. The stock’s 57.8 percent decline in 2017 makes it a great stock-loss selling candidate.
Chesapeake Energy Corp. (CHK)
Retail isn’t the only sector that has been left behind during the market’s big 2017 rally. Natural gas prices are down more than 20 percent for the year, which doesn’t bode well for gas plays like Chesapeake. Chesapeake stock is down 43.7 percent in 2017, giving investors plenty of losses to lock in. In October, Jefferies set an “underperform” rating for Chesapeake, citing high costs, weak inventory and a massive $9 billion debt load. Even within the struggling natural gas space, there are better-positioned stocks.
General Electric Co. (GE)
There was a time when it would have been unfathomable for the Dow Jones industrial average to gain 20 percent in the same year GE stock plummeted 43.2 percent. GE is clearly no longer the U.S. economic bellwether it once was. After a year that included earnings misses, guidance cuts, a dividend reduction and a credit downgrade by Moody’s Investor Service, the only potential silver lining for GE investors may be to take advantage of the tax benefits of their horrible year. After all, GE is now forecasting only tepid 2 to 4 percent long-term earnings growth.
Mattel (MAT)
Much like Under Armour, Mattel has been suffering from the downfall of many of the brick-and-mortar retailers that carry its products. In September, Toys ‘R’ Us, which once single-handedly accounted for as much as 10 percent of Mattel’s revenue, filed for bankruptcy. Earnings losses have increased, revenue has declined and margins have shrunk throughout 2017. To make matters worse, Mattel recently announced it would suspend its 3.3 percent dividend. The stock’s 38.8 percent year-to-date decline makes it a prime candidate for tax-loss selling, especially considering investors have little reason to like the stock’s fundamentals.
Advance Auto Parts (AAP)
Early in 2017, auto parts stocks plummeted on reports that Amazon.com (AMZN) has big plans to enter the space. In the most recent quarter, Advance reported a 17.3 percent year-over-year decline in earnings per share. Margins also declined in the quarter, though not as much as analysts had expected. The stock bounced back a bit following the report, but the stock remains down 38.4 percent in 2017. Investors may want to harvest those losses for tax purposes while they wait for a clearer picture of a potential turnaround.
Foot Locker (FL)
Foot Locker stock has some bullish near-term momentum after beating rock-bottom earnings expectations in the most recent quarter. But like the other retailers on this list, the longer-term outlook for the company is still bleak. In the third quarter, revenue declined 0.8 percent and same-store sales declined 3.7 percent. Competition from Amazon has ramped up, and mall traffic has tapered off in recent years. Foot Locker and competitor Dick’s Sporting Goods (DKS) are both down more than 35 percent this year, and it’s understandable for investors to cut their losses and take advantage of the tax write-off.
TripAdvisor (TRIP)
After pumping $58 billion into TV advertising in 2017, TripAdvisor’s most recent quarterly report revealed no clear return from the investment. Increasing competition for online travel businesses resulted in a $150 million free cash flow deficit, an 11 percent decline in revenue per hotel shopper and an overall 3 percent decline in hotel revenue. Even after a huge 25 percent sell-off in 2017, compared to a 7.9 percent gain for Expedia (EXPE) and a 17.5 percent gain for Priceline Group (PCLN), Trip Advisor stock still trades at a higher forward price-earnings ratio than both peers.
Kroger Co. (KR)
Barring some major December gains, it appears Kroger investors will have roughly a 20 percent loss to harvest before year’s end. Kroger’s bumpy 2017 came to a head in June when the company cut its full-year earnings guidance just days before Amazon announced a buyout of Whole Foods. Rising wages, falling grocery prices and a major new competitor have weighed on the stock. Kroger has recently regained some positive momentum following a third-quarter earnings beat. However, its tepid 1.1 percent same-store sales growth is still well below the 5 percent growth it was consistently reporting just two years ago.
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10 Tax-Loss Stocks to Avoid in December originally appeared on usnews.com
