Tax-loss selling leaves these losing stocks with more room to fall, Morgan Stanley says

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Traders work after the closing bell at the New York Stock Exchange (NYSE) on August 12, 2019 at Wall Street in New York City.

Johannes Eisele | AFP | Getty Images

If you still own these stocks, watch out for more losses ahead.

Morgan Stanley is warning clients certain underperforming stocks will have more room to fall heading in to the fourth quarter as tax loss selling accelerates. Investors often sell losing stocks at the end of the year to lower their tax bill from the capital increases. 

“As we head into 4Q, tax loss selling becomes a possible source of technical pressure on some stocks,” Michael Wilson, Morgan Stanley’s chief U.S. equity strategist said in a note on Monday. 

The bank ran a screen to find the stocks most vulnerable to the tax selling pressure this time of the year. It found stocks that were well-liked by investors and analysts but have suffered at least 10% drop in prices from mid-January to the end of the third quarter. 

“We used some simplifying assumptions to produce a list of stocks that may have a greater probability of underperforming into year end on this technical basis,” Wilson said. “Back testing shows this screening method has had some success in creating a group of stocks that may underperform in 4Q.”

Stocks from this screen have underperformed the broad market by 2.2% on average in the fourth quarter over the past 17 years, according to Morgan Stanley.

The bank’s list of stocks for this year include E-Trade, Tapestry, Cigna, Marathon OilFedEx, DuPont, and Align Technology, which have tumbled as much as 30% in the first three quarters of 2019.

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