Consequently, investors sell their worst-performing stocks to absorb a taxable loss that can offset the year’s (or future years’) profits. To fully absorb the loss, an investor must not purchase those shares for at least 30 days.
Many investors like to combine a tax-loss sale with the purchase of similar stocks in a similar industry. This way they still retain sector exposure, but also absorb the taxable loss. If you’re looking for smart tax-loss trades, there are two to consider.
Sell Telus, buy Quebecor shares
While Telus (TSX:T) is down just 4% this year, down 17% over the past 52 weeks, and down 27% over the past five years. Telus is trading at a 9% yield. This suggests that the market does not believe the dividend is sustainable at current levels.
Telus has been hit by a trio of challenges, including increasing competition, too much debt and underperforming cash flow expectations. Part of the reason for Telus’ troubles has been Québecor‘s (TSX:QBR.B) market share gains in Western Canada. It has been aggressively stealing customers through the recently added Freedom Mobile and Fizz phone plans.
Quebecor has made quick work of its western expansion. The media and telecommunications company currently has a market share of approximately 10%. However, this could double in the coming years. It has a substantially better balance sheet than most comparable companies, so that provides more flexibility.
QBR.B yields just 2.8% today. However, the payout ratio is very sustainable. We can’t say the same about Telus’ dividend. Quebecor could be an interesting pair trade if you want telecom exposure.
Sell WSP, but buy Stantec shares
WSP worldwide (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 with earnings before interest, taxes, depreciation and amortization (EBITDA) margins increasing by 300 basis points. Still, organic growth slowed from high single digits to low single digits. That scared the market.
While I think WSP is worth holding despite the decline, you could take the loss and rotate in Stantec (TSX:STN) instead. This year the increase is 16%. However, over the past six months, rates have recently retreated 9%.
Stantec has built a great engineering and consulting platform. Like WSP, it has used smart acquisitions to expand its business. While Canada is expected to promote new nation building projects in the near future, Stantec is very well positioned to benefit from this. Its valuation has recently corrected and currently looks more attractive.
The silly bottom line
These are just a few examples of pair trades you can make to absorb a tax loss but maintain sector exposure. In some cases (such as Telus) it may be good to completely abandon the incumbent position and choose the emerging competitor (Quebecor).
In other cases (such as WSP) you may want to sell the position within the next 30 days and buy it back at a later date. Both Stantec and WSP face sentiment headwinds in the short term, but both appear to offer good opportunities in the longer term.
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