2-for1 Sale
Some investors sell their losing stocks because they get fed up with the unrealized losses in their accounts. However, stocks go up and down all the time, and investors need to learn to deal with the red in their accounts if they want to be successful.
Even the greatest businesses can fall hard due to temporary reasons or macro factors. Investors should be reminded that this year’s losers could be next year’s winners.
Of course, there’s some wiggle room around that time frame. The shares of a company can remain depressed or stagnant for multiple years, even though the company continues to post higher profits every year if negative sentiment plagues the stock.
Instead of being focused on a stock’s share price, investors should aim to understand the reason behind its actions. Focus on the business instead of the price.
Losing in the last year
There’s no doubt that Empire Company Limited (TSX:EMP.A) has been a loser this year. Year-to-date its shares have fallen 29%. In the last 12 months, they have declined 32%. No one could have even imagined as severe a decline as this two years ago–not even the management of the company.
You see, Empire acquired Safeway in 2013, and it was supposed to boost earnings. The stock did end up skyrocketing north of $30 in 2015. However, since then it has fallen 40% lower to about $18.
The drop is not unwarranted. Its share price has simply followed its falling earnings downward.
In fiscal 2016, Empire’s adjusted earnings per share (EPS) fell 20%. These were largely due to impairment charges representing the write-down of certain store assets in the Sobeys West operating segment. Worse, for the next fiscal year ending in April, Empire’s EPS is estimated to fall another 27%.
Can this loser be next year’s winner?
Empire has treated shareholders well in the past. It has increased its dividend for 21 consecutive years; in the last 10 years, it’s increased the dividend at a compound annual growth rate of 8.2%.
This year the food retailer’s dividend had a token raise of 2.5%, despite the huge decline in the company’s bottom line. This shows management’s commitment to paying a growing dividend to its shareholders.
As management discussed in the most recent quarterly report, it continues to execute strategies “to optimize the execution of [its] store level offerings, to realize the benefits and efficiencies from [its] distribution centre restructuring and through continued work on reduction of the Company’s cost structure.”
As soon as the company shows any sign of recovery in its Sobeys West operating segment, the shares should start to turn around. In the meantime, the food retailer’s 2.2% yield is well covered by a payout ratio of about 38%, despite lower earnings in the coming fiscal year.
Conclusion
As we near the end of December, companies whose share prices have done poorly in the last year, including Empire, might be sold off even more via tax-loss selling strategies.
So, it may benefit you to review this year’s losing stocks and see which ones may be winning candidates in the future and invest at potentially substantial discounts for outsized gains.
