Shares hurt by tax selling may rebound in 2008
NEW YORK (Reuters) - Home builders and financial issues, the biggest casualties of the subprime lending meltdown, were hit again by tax-motivated selling in recent weeks but could rebound a bit early in the new year, money managers said on Monday.
Investors have until the last day of the calendar year to make a trade that will generate a tax loss. Mutual funds generally end their fiscal years earlier and distribute gains to shareholders in the final months of the year.
Home builders, mortgage companies and banks were among the biggest losers in 2007 as the subprime crisis dried up lending, falling home prices and rising foreclosures hit home sales, and spoiled mortgage-related holdings forced multibillion dollar write-downs across Wall Street.
"They were beat up on their own merits, but tax-loss selling helped drive those stocks down more," said Matt Kaufler, portfolio manager at Clover Capital in Rochester, New York.
Rick Meckler, president of investment firm LibertyView Capital Management in, Jersey City, New Jersey, said there has been tax selling in December in home builders, financial stocks and retailers.
"Very few people wait until the very last day, but you might be seeing a little left here," Meckler said.
Calling the 2007 market a "tale of two cities," money manager John Buckingham pointed out that many investors are sitting on big gains in technology and commodities stocks while they are nursing losses elsewhere.
When mutual funds distribute capital gains and income, investors in taxable accounts face a tax bill that could be offset by taking a loss elsewhere in their portfolios.
The Al Frank Fund managed by Buckingham recently made a larger-than-usual $3.25 per share distribution, including more than $3.00 per share in long-term capital gains.
Buckingham, chief investment officer of Al Frank Asset Management in Laguna Beach, California, said there have been other factors besides tax selling affecting the stock market in the final days of 2007.
He said the assassination of Pakistan opposition leader Benazir Bhutto and the subsequent unrest in Pakistan, not to mention some dismal numbers on new-home sales last Friday, have also rattled investors.
Despite the gloom over housing and subprime lending, the average U.S. diversified stock fund was up 6.85 percent year-to-date through December 27, according to fund research firm Lipper Inc. Major stock market averages are finishing the year in the plus column.
Some of the biggest losers may prove too inexpensive to pass up in 2008.
Art Nunes, portfolio manager and strategist for Portland, Oregon-based IMS Capital Management, said to the extent that there was any tax selling late in 2007, the effect should reverse in early January.
San Francisco-based financial services firm Merriman Curhan Ford & Co published a list of 14 beaten down stocks. It said year-end tax-related selling has partially hurt the stocks and there is potential for a rebound early in 2008.
Among the stocks listed were Coinstar Inc (CSTR.O), a provider of retail-store services; fitness-equipment maker Nautilus Inc (NLS.N) and telephone-equipment maker Nortel Networks CorpNT.TO (NTL.N).
Nunes said he started buying stocks of home builders a couple of months ago and has been adding to the positions. He noted that the home builders have been in a bear market for more than two years. The decline in financial shares only started this year, and he thinks it is too early to jump in just yet.
"It would not surprise me if we see a rebound in the beaten-up stocks," said Buckingham.
(Additional reporting by Jennifer Coogan and Caroline Valetkevitch; Editing by Leslie Adler)
