Yahoo Finance These tax-loss selling targets are also table-pounding buys
As we approach year-end, many investors are turning their attention to tax-loss selling, the strategy of selling investments that have experienced a loss in order to offset capital gains and potentially reduce an investor’s tax liability.
There are a few potential benefits of tax-loss selling. The primary benefit is the ability to use capital losses to offset capital gains. If an investor has realized capital gains during the tax year, then realizing capital losses through the sale of other investments can help offset these gains. This could potentially reduce their overall tax liability.
Tax-loss selling also provides an opportunity for investors to rebalance their portfolios. By selling underperforming investments, investors can reallocate their assets to align with their investment goals and risk tolerance.
A third benefit is that investors may use tax-loss selling to exit investments that are no longer aligned with their investment strategy. This can help maintain a diversified portfolio and reduce the risk associated with concentrated holdings.
Investors employing this strategy are generally anxious to complete any trades before year-end so that the losses can be claimed on this year’s tax return. Sometimes, a hasty sale of shares can be completed without much concern for the share price, which can cause downward pressure and present an attractive buying opportunity for astute investors.
We have identified (and own) three attractive buying opportunities for companies whose shares have experienced downward pressure this year, and have no doubt suffered lower share prices due to recent tax-loss selling.
Canadian Tire Corp. Ltd.
Canadian Tire is a retailer most of us are familiar with. The company boasts a strong brand and is a household name. Founded in 1922, the company has more than 100 years of history behind it. Its diverse product offering — tools, automotive, seasonal items, appliances and clothing — means it has plenty of competitors, including big-box retailers, smaller hardware stores, sporting goods retailers and even dollar stores.
In recent years, Canadian Tire has also come under increasing threat from large online retailers that continue to take market share from their brick-and-mortar peers. To defend against this competition, Canadian Tire has attempted to steer its business away from the online threat by focusing on products that are difficult to distribute by mail, including a greater focus on automotive, garden furniture and sports equipment.
Its shares have fallen to about $143, a 34 per cent drop from their all-time high of $215 in 2021. While the S&P/TSX composite index trades at a relatively higher 14.4x earnings, Canadian Tire is very attractive at only 9x earnings — a single-digit multiple. It also offers an impressive dividend yield of 4.7 per cent.
This company delivers plenty of income at a very attractive share price. If shares simply appreciate to their prior level of $215, that would be a 50 per cent return, and that’s without accounting for dividends.
TC Energy Corp.
TC Energy is an energy infrastructure company that boasts a huge portfolio of oil and gas pipelines that connect supply from their production basins to key North American markets. These unique assets are difficult to replicate and represent what Warren Buffett refers to as an “economic moat.”
The company also owns and operates seven nuclear and gas power generation facilities in Canada and the United States. Shares have recently been under pressure due to general macroeconomic concerns and some specific company events, including cost inflation on the construction of its Coastal GasLink pipeline, which has caused some negative headline news. Now that the company has finished installing the pipeline, no further cost overruns are expected to be reported.
In general, higher rates have made bond returns appear more attractive relative to higher-yielding equities. As a result, shares in interest-rate-sensitive, high-income companies such as TC Energy have sold off.
Its shares are at about $50, down 32 per cent from a high of almost $75 last year, representing an attractive value at 11.8x earnings and boasting a very impressive dividend yield of 7.6 per cent. If you like income, this is a great opportunity to pick up some TC Energy shares at a very attractive price.
Toronto-Dominion Bank
TD is a very well-run, high-quality bank with a strong brand within a Canadian banking system that is very proficient. It is a top-10 North American bank and one of the world’s largest. TD is generally viewed as a north-south bank with a focus on retail banking and plenty of branches on the eastern U.S. seaboard, stretching from Maine to Florida.
Its shares were hit hard in March when some regional U.S. banks — Silicon Valley Bank and Signature Bank in particular — failed. As TD had already announced a large US$13.4-billion purchase of Tennessee-based First Horizon Corp., its shares plunged lower. Eventually, TD chose to walk away from its purchase of First Horizon. Now, flush with cash, TD is ready for its next acquisition opportunity to spur growth.
Meanwhile, its shares are currently down more than 20 per cent from their recent high in March 2022. At only 10x earnings, they represent compelling value and offer investors an attractive yield of 4.7 per cent. For investors who want to own a piece of a wonderful business that also offers impressive income, TD represents a convincing buying opportunity right now.
Overall, tax-loss selling has proven to be an effective strategy to offset capital gains and potentially reduce an investor’s tax liability. At the same time, it can also lead to timely buying opportunities in select companies.
The downward pressure caused by recent selling has certainly caused shares in the three companies mentioned above to trade lower as we approach the final few weeks of trading for 2023. These companies now represent very compelling value to buyers, and offer impressive dividend yields while we wait for that eventual capital appreciation.
Robert Gill is senior vice-president and portfolio manager at Goodreid Investment Counsel, which offers individual investors and institutions actively managed investment solutions and advice. He can be reached at rgill@goodreid.com.
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