1 Reason You Should Sell These Dow Losers

In this strong market, only five components of the Dow Jones Industrial Average (DJINDICES: ^DJI  ) have lost value in the past 12 months. So far this year, the number is only three. If you own shares of one of these companies, it might be a good time for you to think about selling all or part of your holdings. Let's talk a little bit about  the companies themselves before we get into the specifics of why.

Chasing the Oracle doesn't always work

Berkshire Hathaway's 5% stake in IBM (NYSE: IBM  )  became public in November of 2011. Since then, the share price has been up and down, and is roughly back where it started. However, if you bought at or near one of a half-dozen peaks in the share price since late 2011, you could be down anywhere from five to 15% today, with revenue and earnings per share declining this year. From the latest earnings announcement: 

The company said that a substantial second-half gain that it was expecting in its prior view of earnings per share will not likely be achieved the end of 2013. As a result, the company updated its prior full-year EPS expectations, including the impact of a second-quarter $1 billion workforce rebalancing charge, to at least $16.25, with the net impact of $0.45 driven by the elongated discussions for its larger divestiture project.

Simply put, management was just wrong about the business' direction. Dig into the latest earnings report and you'll see that IBM's biggest shortfall (down 12%) was in its hardware business, which accounts for roughly 15% of the company's total revenues. Even more concerning, sales in the company's "Growth" markets were flat for the quarter. The bottom line is this isn't just the first two quarters of the year-management's downward revision makes it clear that this isn't going to change overnight. There are larger technology trends that are affecting IBM's business. Fool contributor Adrian Campos has more here.  

Another tech stalwart in the red

A Google search for "the death of the PC" will net over 400 million results. Traditional desktop PC sales are on the decline. Per Gartner, PC shipments in Q2 of 2013 fell 10.9%, after an 11.2% decline in Q1, and a 4.9% and 8% drop in Q4 and Q3 of 2012 respectively . Again, probably not a shocker to anyone, but it's a reminder that the way we compute is changing with the advent of mobile. 

With nearly two thirds of Intel's (NASDAQ: INTC  ) sales coming from its PC Client group, this decline is going to continue to weigh on the company's results. However, the company is investing heavily in mobile processors, and this will stem the losses. The question remains: Will Intel's growth into mobile computing make up for those losses, and bring back growth? Only time will tell.

The nature of commodities

Aluminum stalwart Alcoa  (NYSE: AA  ) is expecting global demand for its product to be up 7% for 2013, but the price of aluminum will continue to weigh on profitability. A strong management team, led by CEO Klaus Kleinfeld, continue to improve operational efficiency, and this will in turn pay off when aluminum prices rebound. Free cash flow has already begun improving. However, there's a chance that, if you bought shares near one of the half-dozen peaks over the past 12 months, you're down by more than 10%. 

The demand for aluminum is expected to remain strong, but the question that Alcoa shareholders need to ask is a simple one: Is it worth waiting around for the commodity price to rebound?

Why should you sell?

The simplest reason for many of you may be to harvest the tax losses. While it's more common to do this near the end of the year, good tax planning and portfolio management is a year-round exercise. In a strong market, this strategy can give you two advantages:

  • If you've sold big winners, losses can cancel out any amount of taxable gains
  • You can apply up to $3,000 ($1,500 for those married filing separately) above and beyond taxable gains against other income

So, not only can it reduce taxes on any gains against stocks you may have sold, but you can apply the balance against your regular income. Depending on your income tax bracket, this could be worth $500-$1,000 in tax savings against regular income. 

Sell versus hold; final thoughts

Here's the share price performance of these three over the past 12 months:

AA Chart

AA data by YCharts

As you can see, all three stocks have seen periods of volatility, and there's no reason to think this will change. The share price could move up or down relatively quickly from where it is today. With that in mind, part of your strategy should be on whether or not your long-term plans are to be invested in the company, and whether selling at a loss today and looking to add back later, is worth the risk of paying more and not ending up ahead of the tax man. 

The bottom line is all three companies offer strong reasons to hold as well as legitimate reasons to sell. But if you want to capture tax losses today, it's a safe bet the market will give you a good chance to buy back in at a decent price. Just be sure to reinvest those tax savings wisely. 

Tax increases that took effect at the beginning of 2013 affected nearly every American taxpayer. But with the right planning, you can take steps to take control of your taxes and potentially even lower your tax bill. In our brand-new special report "How You Can Fight Back Against Higher Taxes," the Motley Fool's tax experts run through what to watch out for in doing your tax planning this year. With its concrete advice on how to cut taxes for decades to come, you won't want to miss out. Click here to get your copy today -- it's absolutely free.


Read/Post Comments (9) | Recommend This Article (5)

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 August 30, 2013, at 12:31 PM, propert wrote:

    You can make a case for selling a company at a loss, but your reasoning using a tax write-off implies that further growth won't occur by January. How can intel get any much lower than $22? There is a lot of support there because of the dividend. It is definitely a buy and hold kind of stock. There is no reason to dump it now. I would argue buying more if it gets any lower to improve leverage position.

  • Report this Comment On August 30, 2013, at 12:44 PM, Gainster wrote:

    This is very narrowminded, so you are probably in sync with wallstreet.

    But long term, it's about what's inside the companies. How the stock has performed doesn't say anything about the future.

  • Report this Comment On August 30, 2013, at 12:45 PM, TMFVelvetHammer wrote:

    *How can Intel get any much lower than $22?*

    Never discount the market's ability to surprise you. It's been said (Lynch? Graham?) the market can remain irrational longer than you can remain solvent.

    With that said, one approach to lock in your losses if you're concerned about the price moving up quickly, is to open a new position before you sell, equal to the size of the portion you are planning to sell for tax losses.

    You can then execute the tax loss sale after you buy. Just be sure your broker shows the sale as the "high cost" shares so you maximize the tax loss.

    But most importantly, talk to your tax professional!

  • Report this Comment On August 30, 2013, at 12:49 PM, TMFVelvetHammer wrote:

    Gainster,

    I would counter your statement that only looking at the businesses, and ignoring a real way to get real value for your losses is also too narrow of a focus.

    I agree that the long-term is about what's happening with the business, and in the short-term stock performance can be very misleading.

    But that doesn't change the reality of selling for tax losses being a relevant and reasonable way to maximize your returns for the long-term.

  • Report this Comment On August 30, 2013, at 1:44 PM, amunson857 wrote:

    Since you just advised me to buy GOOG and INTC for MDP, what should I do about these recommendations? You guys might coordinate among yourselves better!

  • Report this Comment On August 30, 2013, at 2:23 PM, TMFVelvetHammer wrote:

    amunson857-

    This isn't an official recommendation for MDP at all. One of the great things about the Fool, is the "Motley" part. We all have different opinions, and reasons behind what we each write.

    But it's about context, first and foremost.

    If you read the article within the context of the message, you'll see that the idea is more about how investors can take advantage of all the tools at their disposal, including reducing your taxes by selling stocks at a loss if it makes sense for your situation.

    If you notice in the disclosure, you'll see that I actually own shares of Intel, but luckily I am not showing a loss (I've held them for a while) so it wouldn't make sense for me to sell, based on the context of this subject. Long-term,

    I like Intel. But that doesn't mean that selling a position for a tax loss isn't worth considering for someone else.

  • Report this Comment On August 30, 2013, at 4:01 PM, stretcho44 wrote:

    "Traditional desktop PC sales are on the decline. Per Gartner, PC shipments in Q2 of 2013 fell 10.9%, after an 11.2% decline in Q1, and a 4.9% and 8% drop in Q4 and Q3 of 2012 respectively ."

    PC shipments fell in Q2 by 10.9% but the Intel PC Client Group revenues went UP from $7,992m in Q1 to $8,100 in Q2. How did the PCCG revenues go up if Gartner said the shipments dropped by 10.2%???

    Intel has always contended that both IDC and Gartner have no reliable mechanism to measure shipments in developing countries. The lack of correlation between the Gartner and IDC MEASURED numbers versus the Intel published results regularly confirm problems with the data.

    Cheers

  • Report this Comment On August 30, 2013, at 4:26 PM, TMFVelvetHammer wrote:

    Stretcho44,

    Correlating PC shipments and Intel's sales directly to one another over the same periods isn't a good way to analyze the data. Hence looking at the long-term trend.

    A very minor uptick in one-quarter doesn't invalidate more than a year's worth of a measurable trend. Just look at the results of most PC makers for the past couple of years for more strong evidence.

  • Report this Comment On August 30, 2013, at 7:24 PM, techy46 wrote:

    Selling for a tax loss almost always makes sense especially when the market is coming up on a rough spot. Do it soon enogh so you can buy the ones back that you really want in 30+ days.

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