The stock market has performed exceedingly well lately, with the Dow Jones Industrials (^DJI 0.96%) having climbed almost 7% so far in 2013. But some stocks have missed out on the party, and investors who own them want to know why they're lagging behind the overall market.
One reason may well have to do with the unique tax situation that the fiscal cliff crisis created at the end of 2012. Because of impending tax increases, investors changed their usual year-end tax planning, and the result with some stocks appears to have been exacerbated losses after an already poor 2012.
Understanding tax-loss harvesting
Investors made two main changes to their behavior in response to higher tax rates for 2013. First, they did everything they could to realize income before 2012 ended, so they could pay the then-lower 2012 tax rates on that income. The chance to pay less in income tax was the motivation behind the large special dividends that hundreds of companies paid toward the end of the year, as well as some other moves like accelerating dividend payments into 2012 that were originally scheduled to go to shareholders this year.
The other related way that investors changed their behavior was to voluntarily forgo taking tax losses in 2012. Rather, they reasoned that if they waited until this year to take those losses, they'd lead to greater tax savings once rates were higher.
Typically, investors start thinking of taking losses, also known as tax-loss harvesting, in November and December. But with investors waiting until 2013 to sell off their losers, you can see some interesting trends among some stocks that were beaten down during 2012:
- Brazilian oil giant Petrobras (PBR 4.95%) is down 45% over the past year. Yet the company has seen substantial further losses just in the past month, with shares down almost 19% in that shorter time frame. Weakness in the Brazilian real has played a significant role as the Brazilian central bank tries to fight inflation and bolster growth, but Brazil's future prospects look good as the world's attention turns to the nation for the 2014 World Cup and 2016 Summer Olympic Games.
- Luxury retailer Coach (COH 1.34%) has suffered a big setback, falling 34% in the past year. After having survived much of the recession by focusing on customers who were largely unaffected by the downturn, Coach has finally seen sales fall, and just in the past four weeks, the stock is off 17%.
- Baidu (BIDU 3.95%) is down 14% in the past month and 29% over the past year, largely because the Chinese online search giant released somewhat disappointing earnings earlier this month. Yet many analysts believe the company still has huge potential in China and that fears of competition are overblown.
- In Europe, France Telecom (FTE 0.67%) saw further losses in the past month, adding a nearly 10% drop to bring its total losses over the past year to nearly 30%. With the company's dividend under pressure and signs of worsening economic conditions in the eurozone, France Telecom has investors nervous about its future.
As you can see, these four stocks all have fundamental reasons that investors can point to in order to justify their recent losses. Yet tax-loss selling may also have played a role in their further declines, as taxpayers who made smart moves by delaying their tax-loss harvesting until 2013 finally pull the trigger and lock in those benefits.
What's next?
If the tax-loss harvesting theory is correct, then downward pressure from selling should start to let up in the near future. In turn, that could help the stocks hit bottom -- assuming, of course, that their fundamental prospects don't decline further.
Taxes shouldn't be the sole reason for choosing an investing strategy. But often, taking taxes into account can help you make smarter decisions about when to buy and sell stocks. That's why it's a good idea to consider tax consequences both within companies themselves as well as among your fellow investors.
