US Stocks Vulnerable to Tax-Loss Selling

Kingsley Jones

Jevons Global

The US tax year is ruled off at the end of December. Typically, there is tax loss selling in US stocks in the lead up to the end of the year, followed by a relief to selling pressure once the new year arrives. Obviously, there are more losses to take in a bear market year.

In this short note, we reprise our earlier article on Which stocks are most at risk of tax-loss selling? for the Australian market, as of early June, going into the Australian tax year end.

For the detail of the method, see that earlier article, where it is explained in detail.

Estimated tax losses for the top 50 US stocks by market capitalization

Coming out of the recent US earnings season, our goal is to estimate which stocks have built up the largest overhang of possible tax loss selling going into the year end. The results of our study are shown at Exhibit 1. Note that we have included different lines for firms with multiple share classes, since the underlying liquidity may differ. Alphabet has two classes GOOG.O and GOOGL.O, while Berkshire Hathaway also has two classes BRKa and BRKb. These are Reuters codes, so that stocks with the suffix "O" are NASDAQ listed, while the others are NYSE listed.

Exhibit 1: Estimated unrealized profit and loss for the largest fifty US stocks by market capitalization
Exhibit 1: Estimated unrealized profit and loss for the largest fifty US stocks by market capitalization

A few general comments may help set the scene.

Firstly, stocks appearing to the right are significantly in profit, likely to enjoy positive investor sentiment, and unlikely to be targets for tax-loss selling. The top three positive sentiment stocks are Eli Lilly LLY, Exxon XOM, and United Health UNH. As a general comment, the pharmaceuticals, healthcare and energy sectors dominant positive sentiment

Secondly, stocks in the middle zone are around break even. This is an area to watch out for possible reversals of sentiment. We will mention two examples later, in the financials, and within semiconductors. These look to be delicately poised at the present time.

Finally, the mega-cap technology stocks and communication services dominate in the area of large unrealized losses. These are the prime candidates for tax-loss selling through year end. The worst three stocks are Amazon AMZN.O, Disney DIS, and Meta META.O.

Top Three Positive Sentiment Stocks

Eli Lilly LLY has been the stand-out large-cap US safe-haven in this bear market. There is little sign of any deterioration in the current positive sentiment.

Exhibit 2: Eli Lilly continues to show leadership among defensives
Exhibit 2: Eli Lilly continues to show leadership among defensives

The profit and loss chart remains very positive.

Exhibit 3: Eli Lilly unrealized profit and loss remains robust at over 40%
Exhibit 3: Eli Lilly unrealized profit and loss remains robust at over 40%

Exxon XOM has an outstanding bear market.

Exhibit 4: Exxon had a blow-out profit report, and the sentiment has become more positive
Exhibit 4: Exxon had a blow-out profit report, and the sentiment has become more positive

The unrealized profit buffer is still expanding.

Exhibit 5: Exxon unrealized profit is around 30%
Exhibit 5: Exxon unrealized profit is around 30%

United Health UNH has been a very consistent defensive name through thick and thin.

Exhibit 6: United Health was affected during the March 2020 sell-off but not so much in this bear market.
Exhibit 6: United Health was affected during the March 2020 sell-off but not so much in this bear market.

The bullish sentiment is well-supported in the trend of unrealized profit.

Exhibit 7: United Health unrealized profit has remained fairly steady around 25%
Exhibit 7: United Health unrealized profit has remained fairly steady around 25%

Bottom Three Negative Sentiment Stocks

Amazon AMZN.O has been the stand-out large-cap US disappointment in this bear market, having given up over one trillion dollars of market value. Management guided lower in the recent earnings call, which led to a further sell-off. US retail has struggled with growing inventories, and Amazon has excess warehouse capacity. 

Exhibit 8: Amazon has had a miserable year with successive disappointments on earnings calls.
Exhibit 8: Amazon has had a miserable year with successive disappointments on earnings calls.

The unrealized losses in Amazon have been worsening in recent weeks as the down trend resumed after a bracing rally from the mid-year lows. The market seems of have gotten overenthusiastic about the former guidance for a good September quarter.

Exhibit 9: Amazon looks to be experiencing some tax-loss selling activity as the unrealized loss grows
Exhibit 9: Amazon looks to be experiencing some tax-loss selling activity as the unrealized loss grows

Disney DIS has recently resumed its downtrend trend and looks set to be among stocks with substantial end of year tax losses to take. 

 Exhibit 10: Disney has been in a bear market since the final quarter of 2021
 Exhibit 10Disney has been in a bear market since the final quarter of 2021

The unrealized losses did close up some after the mid-year rally but have since begun to worsen as the market began to price in a deteriorating outlook and negative currency translation effects for offshore earnings.

Exhibit 11: Disney unrealized losses are approaching -30%
Exhibit 11: Disney unrealized losses are approaching -30%

Meta META.O can do no right in its journey beyond this reality into the metaverse.

Exhibit 12: Meta is having a particularly ugly bear market as investors lose confidence in the metaverse
Exhibit 12: Meta is having a particularly ugly bear market as investors lose confidence in the metaverse

The worsening state of unrealized losses suggest that Meta will figure prominently in tax loss selling as investors seek to improve tax outcomes going into the year end.

Exhibit 13: Meta rallied recently to reduce the unrealized loss to less than -30%
Exhibit 13: Meta rallied recently to reduce the unrealized loss to less than -30%

Stocks in a finely balanced state of neutral sentiment

JP Morgan JPM was in a deep drawdown for most investors until the last week. This is a delicate time for US financials. Rising interest rates have improved margin in some lines of business, and credit card losses are not too bad. However, rising fixed rate mortgages will eventually pressure consumers and reduce new lending. It is a delicate time for banks.

Exhibit 14: JP Morgan has rallied up to break-even from an earlier bear-market draw down
Exhibit 14: JP Morgan has rallied up to break-even from an earlier bear-market draw down

The earlier draw-down was not very deep at around -20% loss. The situation is worth monitoring as there is some chance the Fed will begin to fade interest rate hikes.

Exhibit 15: JP Morgan has recovered from a -20% drawdown
Exhibit 15: JP Morgan has recovered from a -20% drawdown

Texas Instruments TXN has performed well versus the broader semiconductor market due to the strength of automaker demand. Their chips are used in a wide variety of devices and are generally lower unit price items than are microprocessors and GPU graphics chips.

Exhibit 16: Texas Instruments has had a much milder bear market than most of its semiconductor peers
Exhibit 16: Texas Instruments has had a much milder bear market than most of its semiconductor peers

Texas Instruments looks to be having a good bear market with little portent of tax loss selling to come in December. The main factor to watch out for is any deterioration in auto demand.

Exhibit 17: Texas Instruments is trading back around break even
Exhibit 17: Texas Instruments is trading back around break even

Nvidia NVDA.O is trading very near break-even, having touched that level briefly and then fallen back below. They are due to report next week, against a backdrop of reduced gamer demand for high-end graphics chips. The bright spot for Nvidia has been demand for premium GPUs used in deep learning, and other Artificial Intelligence applications.

Exhibit 18: Nvidia looks to be very delicately poised around break-even going into their earnings report.
Exhibit 18: Nvidia looks to be very delicately poised around break-even going into their earnings report.

Presently, there is no great overhang in the unrealized profit and loss. The risk for Nvidia centers on their forthcoming earnings report on 16-Nov-22. The impact of a slowdown in digital advertising may have reduced demand for GPU chips in the cloud. However, the company also has new product launches to come, and inventories to manage. There is considerable uncertainty on how these countervailing factors will play out.

Exhibit 19: Nvidia did recover from earlier drawdowns of around -25% and is now around break-even
Exhibit 19: Nvidia did recover from earlier drawdowns of around -25% and is now around break-even

Conclusion

Although Australian investors are accustomed to think of tax-loss selling as a mid-year effect, it is an end-of-year consideration for investors in North America.

The analysis of average cost basis cannot, by itself, inform us of the future direction that any particular share price may take. However, it does speak directly to current sentiment, and it can alert us to forward risks, such as the potential for tax loss selling in December.

The sectors at most risk for tax loss selling appear to be technology and communication services. The sectors at lowest risk appear to energy and healthcare.

In the middle, we find a number of financials that are delicately poised, and vulnerable to any further market shocks on inflation, interest rates and unemployment.

Those investors who take advantage of the tax-loss selling season can always wait before redeploying capital. This may be prudent given the uncertain global situation.

In relation to your own personal tax affairs, be sure to consult with a registered tax advisor concerning your own unique tax position.

Tax laws are complex, and your trading actions will alter your likely taxable income.

All pricing data is as at market close in the USA on 9-Nov-2022. Source: Refinitiv.

Photo by Kelly Sikkema on Unsplash

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Jevons Global Pty Ltd is a Corporate Authorised Representative (AR 1250727) of BR Securities Australia Pty Ltd (ABN 92 168 734 530) which holds an Australian Financial Services License (AFSL 456663). GENERAL ADVICE WARNING Please note that any advice given by Jevons Global Pty Ltd (Authorised Representative #1250727) is GENERAL advice only, as the information or advice given does not take into account your particular objectives, financial situation or needs. You should, before acting on the advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. Jevons Global is authorised to provide financial services to WHOLESALE clients only. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Prospectus, Product Disclosure Statement or like instrument. Jevons Global may receive fees from issuers, the subject of the research notes we distribute. In addition, Directors, Authorised Representatives, employees and contractors may own shares or options in the securities mentioned in such notes. jevonsglobal.com

Kingsley Jones
Chief Investment Officer
Jevons Global

Dr Kingsley Jones is Founding Partner/CIO for Jevons Global. He has been Portfolio Manager for the Macquarie Global Thematic Fund and Global Head of Quantitative Trading Research at AllianceBernstein, and holds a PhD in Theoretical Physics....

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