No one likes losing money, but one silver lining is that you can sell stocks with embedded losses to help offset capital gains elsewhere in your portfolio.
Yet, selling a stock is only half the battle. To keep your portfolio allocations within desired ranges, you need to identify undervalued stocks to purchase with those proceeds.
To identify stocks in which investors may have potential capital losses, we searched for stocks that have lost money over two-, five-, and/or 10-year trailing time frames. We then cross-referenced these stocks against our valuations to identify those that are either overvalued or trading at fair value. To find offsetting buying opportunities, we then searched for 4- or 5-star-rated stocks that have similar characteristics to those sold.
Before engaging in any sales, you should first check your cost basis versus the current market price to confirm whether or not you have a capital loss. Every investor will have purchased the stocks at different prices over different time frames, and some may not have a loss to realize.
Top 10 Tax-Loss Swaps to Make Before Year End
- Sell Xerox XRX, buy Salesforce CRM
- Sell SunPower SPWR, buy First Solar FSLR
- Sell Lumen Technologies LUMN, buy either AT&T T or Verizon VZ
- Sell American Airlines AAL, buy Norfolk Southern NSC
- Sell Southwest Airlines LUV, buy Delta Air Lines DAL
- Sell CrowdStrike CRWD, buy Fortinet FTNT
- Sell Palantir PLTR, buy Intellia Therapeutics NTLA
- Sell Agnico Eagle Mines AEM, buy Newmont Mining NEM
- Sell Antero Resources AR, buy APA Corp. APA
- Sell New Oriental Education EDU, buy Yum China YUMC
Here’s more about the rationale behind the suggested swaps. All data is as of Nov. 13, 2023.
Xerox stock has dropped over every time period we checked. Over the past 10 years, this stock has fallen at an average annual rate of 8.2%.
Why sell?: While Xerox stock is currently trading near our fair value and is rated 3 stars, we see better opportunities elsewhere. The stock has long been a melting ice cube, as Xerox’s business is in a secular decline. Over the past decade, revenue has dropped to $7 billion from $20 billion, and we forecast it will continue to deteriorate and do not forecast any meaningful growth in earnings.
What to buy instead?: Salesforce is one of the strongest business services companies we cover, and Morningstar’s senior equity analyst Dan Romanoff believes “Salesforce represents one of best long-term investment opportunities in software, particularly as the company should provide investors with a nice balance between revenue growth and improving profitability.” We assign Salesforce a wide economic moat, and the stock is rated 4 stars, trading at a 16% discount to our fair value.
SunPower’s stock has fallen at an annualized average of 15.1% over past 10 years and dropped at a 41.5% annual average rate over past three years.
Why sell?: The combination of changes in the regulatory environment in California for rooftop solar installations, along with reduced demand caused by rising interest rates and high inflation, has taken its toll on the residential solar business. While the stock is fairly valued and is rated 3 stars, we think investors can harvest the losses and reinvest in other renewable energy stocks trading at greater margins of safety from intrinsic value.
What to buy instead?: For investors looking for an investment in renewable energy, specifically solar energy, we highlight First Solar. First Solar’s stock is currently trading at a 28% discount to our fair value estimate at 4 stars. Whereas Sunpower’s business is focused on the residential market, First Solar is focused on utility scale solar panel manufacturing where demand has held up better. We expect that First Solar will be one of the biggest beneficiaries of the Inflation Reduction Act of 2022, which provides incentives for reshoring solar panel manufacturing back to the United States.
Lumen has dropped at an average annualized rate of 6.4% over the past 10 years. Much of that decline has occurred over the past two years, during which it has fallen at a rate of 61.1%.
Why sell?: Lumen’s stock is currently rated 3 stars, but this is one of the few companies that we rate with Extreme Uncertainty. Stocks with Morningstar Uncertainty Ratings of Extreme are those that we think are the most difficult to value because there is the widest range of potential outcomes.
What to buy instead?: Either AT&T or Verizon. Both stocks are rated 5 stars, trade at over 30% discounts to fair value, and have a dividend yield of over 7%. Both earn a Morningstar Economic Moat Rating of narrow, whereas Lumen has a no-moat rating. While competitors in the wireless business have historically competed with one another on basis of price at the expense of low margins, we expect that changing industry conditions are evolving into more oligopolistic behavior. Looking forward, we expect wireless companies to compete less on price, which will allow margins to expand.
American Airlines has fallen 7.8% on an average annualized basis over the past 10 years, with much of that decline having occurred recently. Over the past two years, it has dropped at an average annualized basis of 23.8%.
Why sell?: The airline industry is a highly competitive business, and none of the airline companies we cover have an economic moat. As such, airlines have had a difficult time passing through inflationary cost increases such as higher labor costs and oil prices, which have squeezed margins. American Airlines stock is rated 3 stars, trading near the top of the range at 12% premium to our fair value.
What to buy instead?: Rarely have stocks in the railroad sector traded at a large discount to our fair values. We assign Norfolk Southern with a wide Morningstar Economic Moat Rating, rooted in its cost advantages and efficient scale. The stock is rated 4 stars and trades at a 13% discount to fair value.
Southwest Airlines stock has declined on a one-, two-, three-, and five-year basis.
Why sell?: Similar to American Airlines, Southwest Airlines does not have an economic moat and has not been immune to the highly competitive nature of the airline industry. Southwest stock is rated 2 stars as it trades at a 22% premium to our fair value.
What to buy instead?: For investors looking to keep exposure to the airline industry, we’d suggest Delta Air Lines. Delta’s stock is rated 4 stars and trades at a 15% discount to fair value. Delta has the largest frequent-flyer program of the U.S.-based network carriers, which drives high-margin revenue. While leisure travel has fully recovered to prepandemic levels, business travel has not. As business travel continues to rebound, we expect that Delta will be the most positively leveraged.
CrowdStrike has fallen at an average annualized rate of 15.9% over the past two years—even after bouncing 40% over the past year.
Why sell?: CrowdStrike faces increasing competition from other cybersecurity vendors who have increasingly made investments in the endpoint security space. The stock is rated 2 stars as it trades at a 23% premium to our fair value.
What to buy instead?: Fortinet is one way that investors can continue to remain invested in the long-term secular tailwind behind the cybersecurity industry. All the cybersecurity stocks have run up, and Fortinet is now rated 3 stars, but in our view, its wide Morningstar Economic Moat Rating and its trading at a 16% discount to our fair value is the best combination of quality and valuation.
While Palantir’s stock more than doubled in 2023, its average annualized loss over the past two years is 7.1%.
Why sell?: Palantir stock got caught up in the early 2021 “disruptive technology” bubble and came crashing down in 2022. As spending on artificial intelligence rises, we believe Palantir, a leader in the AI platform space, stands to benefit. As a result, we are optimistic about Palantir’s opportunities going forward; however, we remain unable to rationalize Palantir’s market valuation, which is why it’s included on this list of potential tax-loss sales. The stock is rated 2 stars, and it trades at a 52% premium over our fair value.
What to buy instead?: Intellia Therapeutics stock also got caught up in the early 2021 “disruptive technology” bubble and came crashing down in 2022. However, we rate Intellia with 5 stars as it trades at a 72% discount to fair value. Intellia Therapeutics is a gene editing company focused on the development of CRISPR/Cas9-based therapeutics. We believe the company’s proprietary technology has the potential to build blockbusters in rare diseases with limited treatment options available. However, this investment is for those who can stomach uncertainty as we assign Intellia a Very High Uncertainty Rating. Intellia currently has no approved drugs and a largely early-stage pipeline.
Agnico Eagle has dropped at an average annualized rate of 11.7% over the past three years.
Why sell?: Agnico’s stock is fairly valued and is rated 3 stars. Most major gold miners trade in relation to movement in the price of gold. This is a case where an investor can capture the tax-loss benefits and swap into another gold miner that trades at a discount to our fair value.
What to buy instead?: For investors who want to remain invested in gold miners, Newmont trades at a 35% discount to fair value and is rated 5 stars.
Antero Resources has dropped 7.0% on an average annualized basis over the past 10 years and has dropped 29.3% over the past year.
Why sell?: Antero Resources produces natural gas in West Virginia and Ohio with a focus on natural gas liquids. While Antero’s focus on liquids reduces its exposure to natural gas price fluctuations, it still contends with infrastructure constraints. We do not assign Antero a moat. Antero trades at a 14% premium to our fair value, placing it at the very top of 3-star range.
What to buy instead?: APA is an upstream oil and natural gas producer in which a vast majority of its domestic production is derived from the Permian Basin, where we think the company has a long runway of drilling opportunities. Although APA also is a no-moat-rated company, the stock is rated 4 stars as it trades at a 35% discount to our fair value.
New Oriental Education has dropped by an average annualized rate of 26.3% over the past three years. Yet, even after this decline, we continue to rate the stock 2 stars as it trades at a 48% premium to our fair value.
Why sell?: In 2021, the Chinese government made sweeping changes in its educational regulations, essentially eliminating private afterschool and weekend tutoring. That tutoring was the bulk of this company’s business, so its stock price quickly tanked. The company has been working to revamp its business to provide nonacademic tutoring and intelligent learning systems and devices.
What to buy instead?: For investors looking to maintain exposure to growth in China, we would suggest Yum China. Yum China is the largest restaurant chain in China consisting of mainly KFC (9,094 units) and Pizza Hut (2,903), but the company’s portfolio also includes other brands such as Little Sheep, East Dawning, Taco Bell, Huang Ji Huang, COFFii & Joy, and Lavazza. We assign this company our wide moat rating, and the stock is 5 stars, trading at a 44% discount to fair value.
Disclaimer: The tax information provided is for informational purposes only and should not be considered tax or financial planning advice. Please consult a tax and/or financial professional for advice specific to your individual circumstance.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.