Gold mining stocks have had a shockingly dismal year. For example, investors of Newmont Mining (NEM) shares have witnessed a 40% decline in just ten months and a day. Worse yet, owners of the stock are exceptionally likely to sell over the coming months to offset capital gains. Indeed, tax-loss harvesting tends to occur more frequently in years when the S&P 500 records double-digit percentages.
When you know that a company or a particular sector is likely to take it on the chin, is there a way to profit from that probability? An aggressive short-seller might try to pile on in a quick trade. However, a contrarian investor would benefit from buying shortly after the harvesters have finished. In the case of NEM, you might wait for the price to bounce off recent lows and climb above a 50-day moving average.
ETF enthusiasts might want to recognize that Newmont Mining (NEM) represents roughly 10% of Market Vectors Gold Miners (GDX). What’s more, the entire segment has been rocked by the price depreciation in precious metals. Nevertheless, the slope of the 50-day trendline shows that the rate of decline for GDX has slowed considerably. Were it not for the probable tax-loss harvesting still to come on the metal miners, one might surmise that GDX is closing in on a bottom.
A bounce for beaten-down stocks or stock segments tends to be most prominent when investors are staring down large gains they may need to offset. In 2012, the major benchmarks had already racked up impressive percentages going into the final two months of the calendar year. And buying the bounce was particularly profitable. The worst Dow performer in 2012, Hewlett Packard (HPQ), had coughed up half of its value from a high to a low. Then, shortly after reclaiming a 50-day moving average, HPQ pole vaulted 80%.
In my estimation, however, the risk associated with picking individual corporations that have been getting cremated is a bit too high. It makes more sense to look for probable tax-loss harvesting in a giving sector with promise, wait for price movement to indicate a changing of the tides, and allocate accordingly.
Farm machinery giant Deere (DE) as well as fertilizer producer Potash Corp (POT) have not been beneficiaries of the record-setting stock rally in 2013. Not only have they lost ground, but they’re likely to see selling pressure in tax-loss harvesting season. The same holds true for Market Vectors Agribusiness (MOO), a fund with a heavy allocation to fertilizer producers as well as equipment builders. That said, MOO might be a tremendous pick-up once the selling pressure tapers. For one thing, it’s hard to imagine a fund with a collective P/E near 10 and a price-to-book near 1.5 failing to entice more buyers. For another, last year’s losers (2013) are often tomorrow’s biggest gainers (2014).