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With the stock market volatile of late, this may be a good time to consider “harvesting” investment losses. This age-old tax strategy is aimed at clearing out investment mistakes before year-end. By dumping losing positions in your taxable accounts, you can generate cash to buy better prospects and trigger capital losses that can offset investment gains and up to $3,000 in ordinary income each year. “If you’re a high-income taxpayer, there’s a new capital gains levy this year, so tax loss harvesting is more valuable than ever,” says Philip Holthouse, of the Los Angeles accounting firm of Holthouse Carlin & Van Trigt.
But you should never jettison a loser that you’d want to repurchase quickly. Tax laws bar you from using capital losses if you repurchase the same (or substantially identical) shares within 30 days of the sale.
Stocks of strong companies are likely to recover quickly as Wall Street’s mood improves, but shares of some troubled companies appear likely to languish for months, if not years, to come. The following eight companies may turn around some day, but the near-term prospects seem bleak enough to make them ideal candidates for harvesting tax losses now.
By Kathy Kristof, Contributing Editor
| October 2014
Share prices and returns are as of October 21.
Headquarters: New York City
Current price: $2.97
Market capitalization: $234.9 million
52-week high: $10.68
One-year return: -67.4%
Teens are fickle fashionistas, and once a popular brand loses cachet, it’s tough to win them back. Few companies know that better than Aeropostale (ARO), the once-hot retailer that has been on the decline for the past several years. Although Aeropostale has revamped its offerings and cut costs, says Morgan Stanley analyst Kimberly Greenberger, its sales are contracting even faster than she had predicted. Aeropostale continues to lose market share and is running short of cash, she says. Unless things turn around quickly, the company could be flirting with extinction.
Headquarters: Bristol, Va.
Current price: $2.06
Market capitalization: $456.2 million
52-week high: $8.30
One-year return: -64.3%
Demand for coal is weak, and prices are down. That has slammed shares of Alpha Natural Resources (ANR), which mines and processes thermal and metallurgical coal. Although management has cut costs and idled a dozen mines, sales and profits are falling, says Morgan Stanley analyst Evan Kurtz. Although Alpha’s top brass believes the price of metallurgical coal has hit bottom, prices are unlikely to bounce back quickly. Even assuming that the coal market recovers next year, analysts think Alpha, which lost $1.4 billion over the past four quarters, is likely to stay in the red through 2016.
Headquarters: Santa Monica, Calif.
Current price: $7.22
Market capitalization: $132.0 million
52-week high: $12.13
One-year return: -29.0%
When Demand Media (DMD) went public in 2011, prospects for this “content farm” were considered so bright that the start-up briefly boasted a market capitalization larger than that of the New York Times Company. Demand Media’s business model involves producing loads of low-cost content on the hot topics of the day, whether that’s Kayne West’s social life or war in Ukraine, to generate clicks and click-based advertising revenue. For a brief time, that course was wildly successful, generating millions of daily page views for Demand Media’s Web sites, such as eHow, LiveStrong and Cracked. But Google thought Demand Media and other content farms were gaming its search engine and leading its users to low-quality content. Because that diminished the value of Google’s own product, the search-engine giant created a new secret formula for its algorithms to make it more difficult to determine how to climb to the top of the results. That has caused Demand’s business model to unravel. With sales slumping and losses soaring, no recovery appears to be in sight.
Current price: $1.18
Market capitalization: $148.7 million
52-week high: $16.94
One-year return: -90.1%
Shares of for-profit education chains have been taking it on the chin since a government investigation found that many of these schools were using high-pressure sales techniques to lure vulnerable students into high-cost, low-value programs. Education Management (EDMC), which operates Art Institutes, Argosy University, Brown Mackie Colleges and South University, is now among a half-dozen companies under investigation by both the Federal Trade Commission and a consortium of state attorneys general. The Department of Education is also weighing new rules that could pull government aid from colleges that fail to provide education that leads to gainful employment. To add insult to injury, Education Management announced in October that its stock is at risk of being delisted from Nasdaq because the company has failed to file timely financial reports.
Headquarters: New Haven, Conn.
Current price: $2.52
Market capitalization: $118.9 million
52-week high: $10.69
One-year return: -69.9%
Like for-profit colleges, Higher One Holdings (ONE), a student loan and debit card company, is under increasing regulatory scrutiny for practices that the government believes have been misleading and abusive. The company sought to help colleges reduce their financial-aid expenses by offering to replace paper checks with debit cards that could be automatically loaded with financial assistance and linked to student checking accounts. But students said the checking accounts and debit cards were loaded with hidden fees. In late 2013, the company agreed to settle six class action lawsuits by agreeing to better disclose fees and to give refunds to past customers totaling $15 million. These changes helped cut 2013 earnings in half. And thanks to “restitution allowances” of $8.8 million in 2014, Higher One lost $3.8 million in the second quarter of this year. With Higher One’s business model in flux, analysts think the near-term prospects for this beleaguered company are dim.
Headquarters: Carmel, Ind.
Current price: $10.75
Market capitalization: $252.1 million
52-week high: $45.80
One-year return: -68.3%
The Consumer Financial Protection Bureau sued ITT Educational Services (ESI), an operator of trade schools, earlier this year, alleging a broad array of wrongdoing, from abusive recruitment tactics to predatory lending. Like Education Management, ITT is also in the crosshairs of a plethora of other regulatory bodies, from state consumer protection agents to federal lending authorities. The combination of bad press and litigation expenses is eating into the company’s enrollment numbers and had analysts concerned about a liquidity crisis. When the company reported on October 17 that enrollment numbers weren’t as bad as investors had feared they would be, worries about a liquidity crisis abated and the stock nearly doubled. But at nearly $11, the stock looks overvalued. Bank of America analyst Sara Gubins thinks ITT shares will trade at $8 in a year.
Headquarters: Huntington Beach, Calif.
Current price: $1.79
Market capitalization: $306.0 million
52-week high: $9.29
One-year return: -71.2%
Quiksilver (ZQK) used the popularity of surf-culture style to turn a company that made swim trunks into a multi-million-dollar clothing enterprise in the 1970s. But the clothier, which focuses on the “philosophy of youth,” has gotten a bit long in the tooth and is competing with hotter, hipper surf apparel lines. The company has had difficulty delivering products to retailers on schedule this year, and that has contributed to declining sales and accelerating losses. It’s unclear how long it might take for Quiksilver to work through the glitches in its new inventory system, the cause of stethe delays. But analysts expect the company to continue to spill red ink in 2015.
Headquarters: Birmingham, Ala.
Current price: $2.04
Market capitalization: $134.4 million
52-week high: $19.50
One-year return: -86.1%
With demand for metallurgical coal – the type used to make steel – still soft, it’s a miserable time to be a “pure play” on this segment of the coal business, as Walter Energy (WLT) is. In the first half of 2014, the mining concern’s revenues fell 15% from the year-earlier period, and its loss tripled. When Morgan Stanley analyst Evan Kurtz downgraded the stock on October 7 from buy to hold, he said that even investors who are willing to bank on a coal-market recovery should steer clear. With $2.8 billion in long-term debt and just $290 million in cash on Walter’s balance sheet, the risk of owning the stock is greater than the potential reward.
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