These 6 Stocks Could Sell Off Hard

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After huge losses in 2008 and equally impressive gains in 2009, stocks have largely taken a breather so far this year. Yet for many companies, 2010 can't end soon enough -- and unfortunately, some of them are likely to take another few lumps before the ball drops in Times Square.

'Tis the season
Every year around this time, investors go into a mini-panic. As you look at your income for the year and weigh gains, losses, and taxable investment income from your portfolio, you may start frantically looking for ways to cut the inevitable tax bill that you'll have to pay in April.

That inevitably leads to taking a hard look at your portfolio's losing stocks for the year. Harvesting tax losses is a time-honored tradition, and it can save you a ton of taxes. You're allowed to use capital losses on falling stocks, bonds, mutual funds, or other investments to offset any and all gains you've earned on sales of winners. In addition, if you have more losses than gains, you can use up to $3,000 of additional capital losses each year to cancel out regular income, including your salary or any interest and dividends you may have received during the year.

No one likes to pay taxes, so you can expect millions of your fellow investors to go through the same thought process you will in trying to find cost-cutting moves against Uncle Sam's grabby fist. Often, the wave of negative sentiment that results from tax-loss harvesting can add insult to injury by pushing the share value of losing stocks down even further to salvage what they can from investments that went wrong.

This year's candidates
Let's take a look at some of the stocks that are likely to feel the effect of tax-loss harvesting this year:


1-Year Return

Selling $10,000 in Shares Could Generate Tax Savings of as Much as

BP (NYSE: BP  ) (29.5%) $1,465
Exelon (NYSE: EXC  ) (15.6%) $647
Monsanto (NYSE: MON  ) (26.0%) $1,230
Adobe Systems (Nasdaq: ADBE  ) (23.6%) $1,081
Medtronic (NYSE: MDT  ) (19.7%) $859
Apollo Group (Nasdaq: APOL  ) (39.1%) $2,247

Source: Yahoo! Finance and author's calculations. Tax savings assume 35% tax rate applies.

The reasons for these drops are as varied as the stocks themselves. In some cases, extraordinary events have caused problems. BP's disaster is well-known, and it also helped bring peers such as Total (NYSE: TOT  ) down in sympathy. Apollo Group has faced scrutiny from federal regulators who are critical of the school's use of student loan funds. Monsanto faced the double-punch of generic competition to its Roundup herbicide as well as backlash from the farmers who are its customers.

On other cases, the causes are more pedestrian. Adobe recently guided its future earnings lower based on pessimistic projections, despite posting impressive growth. Defensive plays like utility Exelon simply haven't interested investors who got used to much stronger gains from faster-growing companies. And Medtronic is simply suffering from recession-related lack of demand for its medical equipment.

How to handle year-end doldrums
What you need to do to protect yourself depends on whether these stocks are already in your portfolio. If you own shares, then joining the mass of tax-loss sellers might be the only way you can get a benefit from the money you've lost. Unfortunately, even if you like the stocks as a long-term investment, wash sale rules force you to wait 30 days before you can buy back shares after you sell them at a loss. That leaves you vulnerable to a potential rebound, which often comes in January. So if you intend to buy back the shares you're selling for tax purposes, do it sooner rather than later.

In contrast, if you don't own these shares but are considering a purchase, you don't necessarily have to hurry to buy. Sure, a Santa Claus rally might well lift share prices across the board. But all other things being equal, selling pressure for tax-loss harvesters could give you even better bargains in the coming weeks. The low price you get may well make a great Christmas present to yourself.

Be careful out there
Events like tax-loss selling show just how inefficient the financial markets can be. By being aware of the phenomenon, though, you can turn it to your advantage.

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Fool contributor Dan Caplinger hates losing, even if he gets a tax break out of it. He doesn't own shares of the companies mentioned in this article. Exelon is a Motley Fool Inside Value recommendation. Adobe Systems is a Motley Fool Stock Advisor pick. Total is a Motley Fool Income Investor choice. Motley Fool Options has recommended a diagonal call position on Adobe Systems, writing covered calls on Exelon, and a synthetic long position on Monsanto. The Fool owns shares of Medtronic. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy loves watching Dick Clark every New Year's Eve.

Read/Post Comments (4) | Recommend This Article (10)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 01, 2010, at 10:54 AM, retrobeast wrote:

    Motley Tool trying to get my ADBE shares cheap.

    Dream on tools because I will not sell before $35.

    Smart money is buing ADBE on goldman sacks lowering on estimates.

    When GS lowers it means they are also buying.

  • Report this Comment On December 01, 2010, at 12:46 PM, daver4470 wrote:

    This is not at all what most tax advisors are telling their clients. This, of all years, is possibly the worst year for tax loss harvesting. Why? We don't know for sure that capital gains rates will stay at 15% for 2011 and beyond, nor do we know what the top marginal rates will be for 2011 and beyond -- and if rates increase, a loss next year will be worth more than a loss this year (as it will be offsetting higher-taxed income).

    I'd expect to see a sell-off of GAINER stocks, not loser stocks, to lock in the 15% rate while you still can, if anything.

  • Report this Comment On December 02, 2010, at 2:34 PM, langco1 wrote:

    a big selloff?? aapl,pcln,nflx,goog,amzn,cmg,ffiv,crm,vmw,ma,gs,deck.why limit it to six here is a bunch that could drop by 75%!! and still be ridiculous......

  • Report this Comment On December 05, 2010, at 6:17 PM, iPhoned wrote:

    Right langco1, I Sold AAPL and F a few months ago waiting for the "BIG SELL OFF" from coming cap gains increase.

    Never happened...

    Luckily was only a handfull of shares each.

    Will still buy if there's a dip before the 31st, but don't hold your breath untl New Years eve.

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