BKSY - Tallying Up My 2022 Tax Loss Selling Portfolio Results

2023-04-03 08:55:13 ET

Summary

• In December of 2022 I introduced a number of stocks which I was adding to my "Tax Loss Selling Basket".
• In this article I summarize the logic and criteria for the basket.
• I then tally up the results including calculating overall returns and looking at the distribution of winners and losers.
• I hope to build another basket in December of 2023 and will share candidates and insight if there is general interest in the strategy.

In December of 2022 I wrote a number of articles presenting candidates for a tax loss selling basket. For example, see here , here , here and here .

The basic premise behind the strategy is:

Investors who have net realized capital gains in the year can offset these by selling losers before December 30th (I previously had said tax treatment is by settlement date, but it's actually by trade date for long positions).

Stocks that are down on the year and preferably at multi year lows are good candidates for such selling.

Because of the year-end deadline, investors who sell can become quite indiscriminate and this can create quick price plunges.

The basic rules for inclusion of possible candidates were:

• Stocks trading 50% or more below their YTD highs as well as being down over longer time frames.
• Focus on stocks priced between $0.25 and $5.
• Screen out poorly valued stocks using Seeking Alpha screening tools.
• Once I have a list of such stocks, I watch for 10% or 20% down dips in the latter half of December to make my buys.

I then try to sell in increments up to a doubling in price if the stock bounces. My max holding period is informed by wash sale rules:

Wash sale rules prohibit recognizing a loss if one re-buys the same security, or options contract for the security, within 30 days of the sale. This means that anyone who actually would still like to own the stock, but first wants to recognize losses he or she has incurred, must wait 30 days after the tax loss sales. This informs my holding period, which is through February of the following year, because there can be buy backs by tax loss sellers from the end of January through the middle of February. By the time February closes, I think the structural aspect of the trade is over.

Results

In December of 2022, I identified 24 potential candidates for this strategy, of which I was able to buy full positions in six stocks and half positions in eight stocks.

The stocks in which I obtained full positions are as follows: AC Immune ( ACIU ), Achilles Therapeutics ( ACHL ), DBV Technologies ( DBVT ), 23andMe ( ME ), Organigram ( OGI ) and Isoray (now Perspective Therapeutics ( CATX )). Of those six, three were profitable, one was a wash and two were sold at a loss. The average holding length as measured by first buy to last sale was 80 days (in reality it's less because full positions were bought in two lots and sales were made in increments, but I feel it's best to be conservative with all of these statistics). Overall the full basket returned 15.6% in those 80 days or about 70% annualized.

Stocks in which I obtained a half position were: InflaRx ( IFRX ), HCW Biologics ( HCWB ), Sesen Bio, Chimerix ( CMRX ), Kandi Technologies ( KNDI ), Trevi Therapeutics ( TRVI ), ASLAN Pharmaceuticals ( ASLN ) and BlackSky Technology ( BKSY ). Of these eight, six were profitable, one was a wash and one was a loss. Overall the half basket returned 21.4% over 53 days or 146% annualized.

Overall the entire basket returned 16.3% over an average holding period of 65 days or 92% annualized.

The full list of potential tax loss plays is presented in the table below. Any rows in which the position size is blank means the stock never dipped to my first buy point in December.

Adjusting the Returns

As can be seen from the table above, I actually had 24 possible candidates to buy. Since my method is to place all orders as soon as the stock comes on to my screen (in order to capture any momentary dip in price) that means that in December I had to have enough capital available to buy full positions in all 24 potential stocks. Therefore, a more conservative method to evaluate returns is to use the total potentially allocated funds as the denominator for the return calculation.

When I do this, the return drops to 6.8% for an average holding period of 65 days or 38.4% annualized. I think this is a more representative quantification of the results and it's still quite attractive.

Note too that I wasn't perfectly disciplined in executing my strategy as I really should have been out of all the stocks by March 1st at latest. Instead, for three of the picks I waited all the way till March 16th to exit the last pieces of my holdings. I haven't gone back to see if my returns would have improved by following my rules more strictly.

Caveat

While the returns on the strategy look good, at least for 2022, the biggest caveat is that the strategy is only viable for a small portfolio and small position sizes. Indeed even with my small orders I was often getting partial fills in lot sizes less than 100 shares at a time. Thus no large player could benefit from this strategy.

2023

Given that the premise of the strategy should once again be valid at the end of this year, I plan to once again build a tax loss selling portfolio in December of 2023. If there is interest, I will also write up as many candidates as possible and then tally the results in March of 2024.

For further details see: