People queue up outside of a Lululemon store in New York on Nov. 28.Jessica Dinapoli/Reuters
Robert Gill is portfolio manager at Fairbank Investment Management.
As we approach year-end, many investors are turning their attention to tax-loss selling, the strategy of selling investments that have experienced a loss in order to offset capital gains and potentially reduce tax liability. There are several potential benefits.
The primary one is the ability to use capital losses to offset capital gains. If an investor has realized capital gains during the tax year, then realizing capital losses through the sale of other investments can help offset these gains. This could potentially reduce their overall tax liability.
Tax-loss selling also provides an opportunity for investors to rebalance their portfolios. By selling underperforming investments, investors can reallocate their assets to align with their long-term investment goals and risk tolerance.
At Fairbank, we have identified three attractive buying opportunities on shares that have experienced downward pressure this year and have no doubt suffered lower share prices as a result of recent tax-loss selling.
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Lululemon
Lululemon LULU-Q is headquartered in Vancouver and was founded in 1998. It is a multinational athletic apparel retailer with shares trading primarily on the NASDAQ. Ostensibly a household name, the company started as a retailer of yoga wear that has more recently expanded into athletic wear and lifestyle apparel. However, the company is more than an athleisure retailer; it has cultivated a community of people who maintain an active and healthy lifestyle.
The company consistently ranks among the top athletic brands in the world by market cap and revenue. Shares have recently been under pressure for two main reasons. First, LULU provided a disappointing outlook for its business on account of tariff uncertainty and new import de minimis duties. Second, while LULU has historically traded at a valuation premium to the market because of its impressive growth prospects, more recently its valuation multiple has contracted – from a 10-year average of 39.4-times to 12.8-times today. By comparison, the Nasdaq market trades at a lofty 32-times earnings.
Shares have corrected 55.8 per cent from their high earlier this year of $423.32 to $187.01 based on the Dec. 11 closing share price. Meanwhile, LULU remains exposed to impressive growth possibilities and outsized profitability, while boasting a fortress balance sheet to weather the proverbial storm.
Furthermore, last week the company announced the departure of its CEO set for Jan. 31, with a replacement to be named in the new year, and also boosted a share buyback by a substantial $1-billion. If shares were to rebound to their prior level, this would imply a return of 126.4 per cent, meaning it would not be a big stretch to get excited about this investment.
CN Rail
Incorporated in 1919 with headquarters in Montreal, CN Rail CNR-T is a big blue-chip railroad that is a household name. CNR transports lumber, grain, energy and containers across key North American markets. These unique assets are virtually impossible to replicate and represent what Warren Buffett refers to as an “economic moat.”
CNR’s rail network is heavily exposed to cross-border trade, making it highly sensitive to changes in international trade policies. The fear of a trade war leading to a recession has a significant negative impact on demand for CNR’s services. Subsequently, management has twice reduced the company’s growth outlook this year, citing ongoing uncertainty and reduced visibility.
This reduction in guidance has temporarily undermined investor confidence in a quality company, causing the stock to retest multiyear lows. Nevertheless, with the benefit of a long-term perspective, the company remains a magnificent business. It operates as the arteries of the Canadian economy, distributing goods from coast to coast.
At Fairbank we like railways for three reasons: rail is the most efficient way to move goods; rail is the most environmentally friendly method of transporting goods; and one cannot outsource the service rail provides to low-labour-cost regions of the world. Moreover, the long-term visibility is clear: railways will continue to provide their essential services in 10 years, 20 years and even 50 years from now. This is what you call a durable competitive advantage.
Meanwhile, shares are down 25 per cent from their all-time high of $179.28 in 2024 to $134.50 today. CNR shares trade at only 16.1-times earnings, considerably more attractive than the S&P/TSX Composite Index at 21.5-times earnings. CNR also pays a solid 2.6-per-cent dividend yield. If shares were to appreciate to their prior level of $179.28, this would imply a 35.9-per-cent return including the dividend.
Novo Nordisk
Novo Nordisk NVO-N is a leader in pharmaceutical research, development and manufacturing, delivering life-changing treatments for diabetes, obesity and other serious chronic conditions. The company was founded in Denmark in 1923, with an international reach spanning the world.
Shares are down for predominantly two reasons. First, Novo has experienced slowing demand in key markets for its blockbuster diabetes drugs Ozempic and Rybelsus and market-leading obesity medication Wegovy. This caused Novo to cut its full-year sales forecast and reduce estimates for operating profit growth. Furthermore, there is some concern that rival meds from competitor Eli Lilly have somewhat squeezed Novo’s market share and pricing power.
Nevertheless, this perspective conveniently overlooks many of Novo’s durable business characteristics. The company asserts a globally dominant leadership position in obesity and diabetes treatments with 54-per-cent value market share. The global market for diabetes and obesity treatment remains massive, with many regions remaining underpenetrated.
Nonetheless, the share price pullback has highlighted Novo as a tax-loss selling target, adding additional selling pressure on shares and compressing the price by 65.3 per cent from an all-time high of $142.88 last year to $49.59 today. While the S&P 500 trades at 31.2-times earnings, Novo trades at only a fraction of that at 13-times earnings. If shares were to appreciate to their prior level of $142.88, this would imply an impressive return of 188 per cent – without accounting for the dividend.
Final thoughts
Tax-loss selling has proven to be an effective strategy to offset capital gains and potentially reduce an investor’s tax liability. At the same time, it can also lead to timely buying opportunities in select companies. The downward pressure caused by recent selling has certainly caused shares in the three companies mentioned above to trade lower as we approach the final few weeks of trading for 2025. These companies now represent compelling value to buyers while we prepare for that eventual capital appreciation.