Seasonal tax-loss selling can mean rich pickings for investors

Good stocks will be dumped along with bad ones to offset gains

By Carolyn Leitch
Investment Reporter

Savvy investors are making some long lists at this time of year: They're shopping for the stock market gifts generated by the annual ritual of tax-loss selling.

December is the month when many market players try to make the best of bad stock picks by doing some strategic culling.

The festival of selling usually takes place during November and December, when investors sell the slumping stocks in their portfolio ti generate a capital loss that offsets the gains made on the winners.

The annual purge means that some companies with good fundamentals will see their stocks dumped.

Patrick McKeough, publisher of the Successful Investor newsletter, points out that by bunching their sales in the final weeks of the year, these investors compete against each other and drive down stock prices. By selling for arbitrary tax reasons, they throw out good stocks along with the bad ones.

Meanwhile, seasoned investors are often waiting on the sidelines to pick up these out-of-favour issues at a bargain price.

Benj Gallander, co-editor of the Contra The Heard newsletter, said tax-loss selling season offers the rich pickings.

"We do the majority of our buying in December."

Mr. McKeough points to Arbor Memorial Services Inc. as a stock that he believes has been unfairly beaten down. The shares have dropped from $18.75 at the start of the year to $11.80 at yesterday's close on the Toronto Stock Exchange.

Mr. McKeough said the highly publicized travails of Lowen Group have raised investor doubts about the entire industry, despite the fact that, in his opinion, Arbor is better managed and more conservatively financed that Loewen.

"It stands to gain a competitive advantage from Loewen's troubles," he said.

Mr. McKeough rates Leitch Technology Corp. a "buy" for aggressive investors. He said the maker of video ad audio equipment stands to gain as broadcasters around the world upgrade their equipment from the older analog technology to digital.

The stock has slipped from $40 one year ago to yesterday's close of $17.50 on the TSE.

Other stocks on Mr. McKeough's radar screen include Prudential Steel Ltd., Agrium Inc. and Premdor Inc.

Prudential, which is the highly volatile business of selling tubular steel and other products to the oil and gas industry, has seen its shares decline from $14.75 in September to $11.70 yesterday.

Agrium's stock has dipped to $12.05 yesterday on the TSE from $15.75 in August as the fertilizer giant struggled with rising prices for the natural gas it uses in the production of fertilizer. When gas prices rise, Agrium has to raise its prices, which in turn leads to a drop in demand.

Shares of Premdor have fallen from $18.50 in May to $12.85 on the TSE yesterday. Mr. McKeough said investors may fear that Premdor, which makes door, will suffer froma housing slowdown.

Mr. Gallander at Contra The Heard is looking at Aur Resources, a mining play with a lot of cash.

"It's one of the cleanest balance sheets you'll find in that industry," Mr. Gallander said.

The stock, which closed at $2.23 on the TSE yesterday, changed hands at prices as high as $3.47 in September.

Mr. Gallander also likes Miramar Mining Corp. for investors who can stomach a speculative buy. The stock has slipped to 71 cents at yesterday's close from $1.50 one year ago.

One U.S. stock that has caught Mr. Gallander's attention is Bethlehem Steel, which has fallen to $6.81 (U.S.) at yesterday's finish on the New York Stock Exchange from $10.93 in April.

"They've been hit reall, really badly," Mr. Gallander said.

He adds that food distributor Fleming Cos. Inc., which was a $30 stock at one time, was hurt by tax-loss selling last year. The shares have lost another 10 percent in 1999 to close yesterday at $10.43.

On the flip side, investors who want to participate in the seasonal selling should keep in mind that it takes three days to settle a stock trade and several trading days will be lost at the end of the year because of statutory holidays. Ernst & Young says the final day for tax-loss selling in 1999 will be Dec. 24.

Revenue Canada's rules of tax-loss selling demand that you not repurchase the security for 30 days. If you do, the sale will be deemed "superficial" and disallowed.

Also, the rules say that even if the tax loss is not utilized to offset capital gains this year, it can be carried back three years to offset capital gains that have already been reported.

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