Tax loss selling can be a powerful force in the market. At year-end, investors and money managers don’t like to see red on their books from underperforming stocks. Many investors like to complete a portfolio clean up before the start of the new year.
Consequently, investors sell off their worst performing stocks to capture a taxable loss that can offset gains from the year (or for future years). To fully capture the loss, an investor must refrain from buying that stock for at least 30 days.
Many investors like to pair a tax-loss sale with the purchase of a comparable stock in a similar sector. That way they still maintain sector exposure, but also capture the taxable loss. If you are looking for some smart tax-loss pair trades, here are two to consider.
Source: Getty Images
Sell Telus, buy Quebecor stock
While Telus (TSX: T) is only down 4% this year, it is down 17% in the past 52 weeks and 27% in the past five years. Telus is trading with a 9% yield. This suggests the market does not believe its dividend is sustainable at current levels.
Telus has been hit by a trifecta of challenges that include rising competition, too much debt, and underperforming cash flow expectations. Part of the reason for Telus’ troubles has been Quebecor’s (TSX: QBR.B) market share gains in Western Canada. It has been aggressively stealing customers through its recently added Freedom Mobile and Fizz phone plans.
Quebecor has made quick work of its Western expansion. The media and telecommunications company has approximately 10% market share right now. However, it could double that in the years ahead. It has a substantially better balance sheet than most of it peers, so that provides more flexibility.
QBR.B only yields 2.8% today. However, its payout ratio is highly sustainable. We can’t say the same about Telus’ dividend. Quebecor might be an interesting pair trade if you want telecom exposure.
Sell WSP, but buy Stantec stock
WSP Global (TSX: WSP) has been a great performer over the long term. Yet, it is down 6% this year and 13% in the past six months. WSP delivered an exceptional quarter where earnings before interest, tax, depreciation, and amortization (EBITDA) margins increased by 300 basis points. Yet, organic growth slowed from the high single digits to low single digits. That spooked the market.
While I think WSP is worth holding despite the decline, you could take the loss and rotate into Stantec (TSX: STN) instead. It is up 16% for the year. However, it has recently pulled back 9% in the past six months.
Stantec has built out a great engineering and advisory platform. Like WSP, it has used smart acquisitions to expand its business. With Canada expected to advance new nation-building projects in the near-future, Stantec is very well positioned to benefit. Its valuation has recently corrected and currently looks more attractive.
The Foolish bottom line
These are just a few examples of pair trades you can make to capture a tax loss, but maintain sector exposure. In some cases (like Telus), it might be good to completely exit the incumbent position and choose the up-and-coming contender (Quebecor).
In other cases (like WSP), you might want to sell out of the position for the next 30 days, and then buy back in at a later point. Both Stantec and WSP are facing some near-term sentiment headwinds, but both look like good opportunities longer term.
