Big investors' pain could soon be your gain. Some giant funds are all but forced to sell some S&P 500 stocks now for tax purposes that are primed for big jumps, says Bank of America.
XAll told, 13 S&P 500 stocks, such as health care Incyte (INCY), communications firm T-Mobile US (TMUS) and information technology Global Payments (GPN) are "temporarily depressed" by tax-loss selling by mutual funds and other institutions. But all these stocks are expected to top the market over the next few months. Talk about taking money from the pros.
Stocks that pros are forced to sell at a loss at year's end often soar afterward — sometimes rapidly. Tax loss harvesting candidate stocks, which are down 10% or more in the first 10 months of the year, soared 5.6% in the following three months since 1986. That topped the S&P by nearly 44% in that time, BofA says.
"Selling by institutional clients has typically peaked in October, suggestive of potential tax loss selling ahead of the Oct. 31 deadline for mutual funds to realize capital gains," says the report co-authored by BofA's Quant and Equity Strategist Savita Subramanian. "In line with history, institutional clients have been big sellers of equities in recent weeks."
Making S&P 500 Money Off Forced Selling
Individual investors know to sell loser stocks by the end of the calendar year. That way, losses can offset capital gains or even offset up to $3,000 in income in the tax year. But institutions like mutual funds must sell by Oct. 31 due to the Tax Reform Act of 1986, BofA says.
Looking at data going back to 2008, BofA found selling by institutions maxes out in October and in December by private clients. Given that pros control the majority of stocks in the S&P 500, it's their selling that matters most.
But while big investors must sell, that's your chance.
All these stocks are undervalued and ready to spring higher, BofA says. All 13 carry "buy" ratings from BofA. And they are expected by rise upward of 44% in just 12 months by consensus of Wall Street analysts, says an Investor's Business Daily analysis of data from S&P Global Market Intelligence and MarketSmith.
BofA pinpointed these potential tax-loss winners by looking for any that dropped at least 10% or more this year as of Oct. 22 when the bank did the analysis. A loss this big all but compels big investors to sell. Why? By selling before the Oct. 31 cutoff, the pros can get the loss off their year-end records and trigger a lucrative tax loss.
Buying Big Investors' S&P 500 Stock Losses Pays Off
Winning from big investors' losses in the S&P 500 is a surprisingly reliable strategy, too, BofA found.
Specifically, it paid off well in the following three months after October upward of 70% of the time. And it worked well in every year from 2000 through 2012 and also from 2016 through 2020. The only time in the past five years the strategy didn't work was in 2019. It was "overshadowed" by other political and Covid-19 events, says BofA.
It's important to know, though, the strategy works best in November and January. BofA notes the stocks tend to rebound following the Oct. 31 selling deadline for mutual funds and Dec. 31 cutoff for all others.
The biggest tax-loss gain is seen in Incyte. Analysts think shares of the biotechnology company will soar more than 48% in the next 12 months. But big investors can't wait that long if they want their tax loss. Shares are down more than 24% this year.
And some of the tax-loss companies are already jumping. Both FedEx (FDX) and Ross Stores (ROST) are down less than 10% this year. But just on Friday, they were down more than 10%.
"Perhaps investors will lock in losses (and gains) ahead of tax rate uncertainty, or conversely will exhibit a stronger proclivity for holding losses to harvest against gains in a higher tax rate environment," says BofA. "But either reaction would be moot if the change was made retroactive to 2021, which is likely, in our view."
Bank Of America's Tax-Loss S&P 500 Winners
All expected to jump after falling 10% year to date through Oct. 22
| Company | Symbol | Stock YTD % ch. (as of Oct. 22) | Upside to analysts' 12-month target | Sector |
|---|---|---|---|---|
| Incyte | (INCY) | -24.4% | 48.6% | Health Care |
| T-Mobile US | (TMUS) | -13.3% | 44.4% | Communication Services |
| Global Payments | (GPN) | -26.7% | 43.1% | Information Technology |
| Viatris | (VTRS) | -25.6% | 43.0% | Health Care |
| Vertex Pharmaceuticals | (VRTX) | -22.3% | 40.0% | Health Care |
| Fidelity National Information Services | (FIS) | -11.6% | 35.2% | Information Technology |
| Penn National Gaming | (PENN) | -13.6% | 33.1% | Consumer Discretionary |
| Qualcomm | (QCOM) | -13.6% | 32.1% | Information Technology |
| Western Union | (WU) | -10.8% | 31.0% | Information Technology |
| FedEx | (FDX) | -10.3% | 25.8% | Industrials |
| AT&T | (T) | -11.4% | 24.6% | Communication Services |
| Lamb Weston | (LW) | -25.0% | 22.9% | Consumer Staples |
| Ross Stores | (ROST) | -10.1% | 21.0% | Consumer Discretionary |
Sources: Bank of America, IBD, S&P Global Market Intelligence
Follow Matt Krantz on Twitter @mattkrantz
YOU MAY ALSO LIKE:
Bank of America Names Top 11 Stock Picks For 2021
8 Top Stocks Will Soar Again In 2021, Analysts Say
MarketSmith: Research, Charts, Data And Coaching All In One Place
These 12 Stocks Turned $10,000 To $257,833 In 12 Months
A 'New Normal' For Market Rally; Three Giants Near Buy Points
