Usually in December, companies that have had a tough year are sold off in order to use the tax losses to offset gains. However, despite Apple's terrible two months, the pressure may be coming to an end because of the "wash sale" rule.
On September 10 we warned that Apple (Nasdaq: AAPL) investors may be wise to take profits. We received our share of angry phone calls and emails, but stuck with our opinion. Now that Apple is down 23% from its close on September 10, it’s time to revisit the story. The chart is scary, but the fundamentals are good…
Last week we talked about selling puts to cash in on a waffling market. Some good companies have been trading off despite fundamentals remaining strong — or, in some cases, improving. But there hasn’t been a trend. What we have seen is that the same driver behind special dividends is hurting some companies’ share prices: Tax-gain, as well as tax-loss selling, is impacting the market this month.
Usually in December, companies that have had a tough year are sold off in order to use the tax losses to offset gains. However, this year is different.
Companies that have had a great run are being sold to capture the lower tax rate, as well. In just three weeks, stock holders will need to pay 40% on capital gains rather than 15%. So if you think you may need to sell a stock in your portfolio in the next 13 months, you’re much better off selling today. This is going to hurt a lot of companies.
Why is this affecting Apple? Apple has an over-loved product line with technical forces working against it, bad comps and a management team that’s doing its best to push down the share price.
Everybody wants its products, whether it’s an iPhone, iPad or MacBook, but there are some things working against it:
1. Management transition
The visionary of the company died. I don’t mean to sound cold, but a product company has transitioned from the hands of a visionary to the hands of a manufacturing expert. It may work out, but the overt leadership is gone.
2. The industry
Apple is a hardware company, and it’s in an environment where other great hardware companies have fallen to margin pressure — HP (NYSE: HPQ), Dell (Nasdaq: DELL), Research in Motion (Nasdaq: RIMM), Nokia (NYSE: NOK). Each of these companies owned a niche, while Apple is creating an ecosystem — but that difference will be realized next year.
3. Tax-gain selling
We’re at a point where investors are looking to take gains before the year’s end in companies that may be seeing increasing competition. Google’s CEO is making public announcements about Android taking a share, while Tim Cook is apologizing for missteps.
4. Tax-loss selling
Anybody who initiated an Apple position after March is under water and can benefit from tax-loss selling despite the multi-year run.
It has been a terrible two months for Apple, but the pressure may be coming to an end because of the “wash sale” rule. In order to take the tax loss, an investor cannot buy back the shares for one month. Since the fourth quarter is Apple’s strongest quarter, if an investor wants to capture the tax loss but still own Apple for this event, he needs to sell more than one month before the announcement.
For Apple, this means selling will stop the week of the Dec. 17. The reporting date for fourth-quarter earnings has ranged from Jan. 17 to Jan. 23 over the last five years. If professional investors are taking this into account, one leg of the selling will soon be over and could mark the bottom for the stock.
Tax-loss and tax-gain selling can temporarily disrupt supply and demand in stocks with high valuations, but when investing for the long term, the fundamentals of the company will win out.
David Eller is part of the research team at InvestmentU.com.