With 2014 rapidly coming to an end, many investors are selling off some of their losing investments to reap the tax benefits.
Keep in mind that it's not a good idea to sell off stocks that you believe in simply because they've performed poorly this year. But tax-loss selling can be a good strategy if something has fundamentally changed within the company.
We asked three of our analysts which stocks make good candidates for tax-loss selling this year. Here's what they had to say.
One stock I'm considering for tax-loss selling is Prospect Capital Corporation (NASDAQ:PSEC). Shares are down by about 26% over the past year, and while I would normally see such a stock as a bargain buy, Prospect seems to be getting cheap for a reason.
Investors' fears that Prospect's dividend was unsustainable were finally validated this past week when the company cut its dividend by 25% beginning with February's payment. This comes just a month after the company implied that it could continue paying its dividend.
Additionally, the company has been selling shares for less than their net asset value, which it has said in the past was to be avoided. Sure, it has suspended at-market sales for the time being because it trades for more than 20% below book value, but this should be expected.
Yes, the dividend cut was needed, and shares currently trade for a nice discount. I have been bullish on Prospect throughout its drama with the SEC, the threats of class-action lawsuits, and the removal of business development companies from S&P and Russell Indices. However, after management assured shareholders that all is well, only to cut the dividend shortly after, I'm starting to think twice.
One stock that's a good choice for tax-loss selling this year is Chesapeake Energy (NYSE:CHK), the oil and gas producer that seems to have a knack for being in the wrong place at the wrong time.
Until a few years ago, Chesapeake Energy was the United States' premier natural-gas producer in many investors' eyes, with strong corporate leadership and aggressive strategies designed to make the most of the newfound wealth of natural resources that hydraulic fracturing and other unconventional recovery methods had unlocked. Yet with the explosion in production activity, natural-gas prices plunged, and Chesapeake found itself overexposed to the gas market. In response, it aggressively divested many of its gas assets in favor of more lucrative oil-producing properties.
Now, Chesapeake finds itself having moved toward oil at the most inopportune moment. With crude oil having plunged below $60 per barrel, Chesapeake now faces the unenviable dilemma of how to ride out what could be a prolonged downturn for the energy industry. Although much of its production is hedged for 2014 and 2015, Chesapeake's long-term prospects remain in doubt.
Chesapeake isn't alone: Many smaller oil and gas production companies face the same challenges. Those who don't want to give up on Chesapeake can sell their shares, buy into one of its competitors or an energy ETF, and then buy back their Chesapeake shares after 30 days. Yet given few signs of a quick energy rebound, Chesapeake stock could be stuck in a rut for a long time.
Heading into 2014, Glaxo looked as if it was poised to rebound from the huge loss of its top-selling lung drug Advair to the ravages of the patent cliff. As a refresher, investors were expecting Glaxo to make major strides on the oncology front with MAGE-A3, a vaccine indicated for non-small-cell lung cancer. But when a late-stage trial failed to meet its primary endpoint or show any benefit to even a sub-population of patients, Glaxo decided to sell off its entire oncology unit to Novartis AG (NYSE:NVS) and refocus on its less profitable vaccine business.
Next up, shareholders were hoping that newer respiratory drugs such as Anoro and Breo Ellipta would take the baton from Advair, helping Glaxo to retain its dominance in this growing market space. Unfortunately, payers in the U.S. eschewed Glaxo's latest offerings for their cheaper competitors, causing the company to announce massive layoffs as a cost-saving measure.
And then there was the China bribery scandal that cost Glaxo roughly $500 million in fines and seemingly triggered a host of similar allegations in other emerging markets.
With few bright spots remaining in GlaxoSmithKline's product portfolio or clinical pipeline, this stock looks set to continue its downward spiral.
Dan Caplinger, George Budwell, and The Motley Fool have no position in any stocks mentioned. Matthew Frankel owns shares of Prospect Capital. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.