When rumors surfaced that President Joe Biden would increase the capital gains tax, stocks promptly fell. For the week following, markets bounced back, forgetting the potential tax hike. Market participants figured the policy would only hit the rich.
James Angel is an associate professor at Georgetown University’s McDonough School of Business. Recently, InvestorPlace asked him how the infrastructure plan — which includes a 7% increase to corporate tax rates — would affect stocks. in an email to InvestorPlace, Angel pointed out that, even before the current administration, the country faced a huge debt burden. Furthermore, he said that “if the tax rate goes up, the after-tax cash flows and thus the present value goes down. This will be a headwind depressing stock returns, although much of that has probably already been incorporated in stock prices.”
Of course, companies in the construction sector will benefit nicely from the infrastructure plan. However, going back to the tax hike that will pay for it all, there are some stocks that are at risk of a selloff. Which ones are they?
In my opinion, these seven stocks could fall substantially. Those that gained the most during the multi-year bull market will have the biggest unrealized gains for investors.
In the table above, Amazon scores the best overall. The e-commerce giant has strong growth and quality scores. At the same time, its value score is 32 out of 100. So, investors selling the stock to avoid higher taxes should end up ahead.
Meanwhile, Gamestop, Microstrategy and Nio all have mixed scores. The growth score is not high enough to justify holding them for the long-term. When a higher tax bill looms for capital gains, investors may want to consider selling them.
- Amazon (NASDAQ:AMZN)
- Gamestop (NYSE:GME)
- Microstrategy (NASDAQ:MSTR)
- Nio (NYSE:NIO)
- Novavax (NASDAQ:NVAX)
- Silvergate Capital (NYSE:SI)
- Tesla (NASDAQ:TSLA)
Stocks to Sell on a Higher Capital Gains Tax: Amazon (AMZN)
Online retail giant Amazon is a revenue generator that investors should try not to sell. That said, the 356% return in five years is a tax liability for long-time shareholders. Selling the stock before the capital gains tax would increase the total investment return. Investors are betting that the remaining upside in the stock is less than the capital gains tax owed.
In its first quarter, Amazon posted first-quarter earnings of $15.79 a share. Revenue rose by nearly 44% to $108.5 billion. Now for Q2, the company expects net sales of $110 billion to $116 billion. Additionally, operating income will be in the range of $4.5 billion and $8 billion, compared with $5.8 billion last year. On top of that, Amazon Web Services (“AWS”), Amazon Studios, Amazon Devices and Services and Shopping are all at the sweet spot of growth. So, investors selling their position today would be giving up future gains just to avoid the capital gains tax liability ahead.
That said, selling the stock ahead of the news and buying it back again after the dip is another option. This way, an investor will participate in the upside for AMZN stock while paying a lower tax on fewer gains.
Gamestop has traded as low as $3.77 in the last year. However, because short sellers built too big of a position and could not get out, the stock has risen by around 4000% to today’s price. Currently, GME’s short float is still very high, shown here at around 20%. Reddit’s r/WallStreetBets subgroup will not let GME stock go.
However, investors sitting on these staggering gains may not have to rely on the Reddit group to keep the stock moving higher. On Apr. 27, the company sold 3.5 million shares to raise $551 million. That sale did not dilute shareholders enough to hurt the stock. In fact, it did the opposite and GME trended higher.
What’s more, on Apr. 19, the company announced that CEO George Sherman would step down. This paves the way for a leader with e-commerce experience to lead the company out of the brick-and-mortar retail market.
That said, Gamestop still has a long and difficult path ahead of itself. As such, shareholders may want to sell the stock ahead of the new capital gains tax hike before everyone else does.
Stocks to Sell on Higher Capital Gains Tax: Microstrategy (MSTR)
Recently, Microstrategy’s CEO, Michael Saylor, pinned the company’s balance sheet on the value of Bitcoin (CCC:BTC-USD). So far, this bet has worked. Bitcoin’s rise has lifted the book value of MSTR stock. After trading as low as $110, the stock peaked at $1,315 in early February. Moreover, the rising value of Bitcoin should send MSTR shares higher again.
However, investors who have made a fivefold return or more on this name may want to sell the stock now instead of relying on the price of Bitcoin. In Q1, this company held more than 91,000 bitcoins.
Microstrategy’s underlying business is not growing by much. For the quarter, revenue grew by 10.3% year-over-year (YOY) to $122.9 million. Conversely, subscription services and product licenses grew by 52.3% to $31.3 million. These figures pale in comparison to the company’s current bitcoin holding value of around $5.2 billion.
Selling MSTR stock shares before a potential drop will lock in the capital gains here. More importantly, investors who do sell will experience a lower capital gain tax.
Nio’s 52-week low is currently $3.18. Now, even if investors missed the chance to sell the Chinese electric vehicle (EV) firm at its January peak of $66.99, shares are still up over 1000% from the low. Nio posted strong Q1 results to justify the recent rally. However, the warning that followed should spook investors.
For Q1, Nio posted strong vehicle sales growth, with sales topping $1.13 billion in the quarter. That was up by almost 490% YOY. Additionally, the company’s vehicle margin rose to 21.2%, an important metric that improved greatly over the negative 7.4% posted in the previous year. Lastly, Nio’s gross margin was 19.5%.
That said, although this company posted gross profits of $237.3 million, its net loss of $68.8 million is a concern. Nio still needs to grow unit sales and invest in its battery-swapping stations. On the results, CEO William Bin Li said, “demand for our products continues to be quite strong, but the supply chain is still facing significant challenges due to the semiconductor shortage.”
The semiconductor shortage will slow unit sales and hurt demand. Likewise, a capital gains tax hike will affect what you take away. As such, investors should sell NIO stock sooner rather than later instead of waiting for a rebound.
Stocks to Sell on Higher Capital Gains Tax: Novavax (NVAX)
In the biotechnology sector, Novavax’s rise from its 52-week low of $19.62 implies a gain of over 700% today for early investors. That would also mean a hefty capital gains tax, however. Plus, the Covid-19 vaccine maker has yet to ship or sell any products, instead just having orders to fulfill once regulators approve its vaccine.
On the vaccine front, Novavax also faces fierce competition from Moderna (NASDAQ:MRNA), Pfizer (NYSE:PFE) and Pfizer’s development partner Biontch (NASDAQ:BNTX). Astrazeneca (NASDAQ:AZN) continues to ship more doses, too. Finally, after Moderna committed to increasing the global shipment supply to 3 billion by 2022, Novavax is facing a shrinking total addressable market.
True, NVAX does have some advantages over the competition. For example, it’s developing vaccines for other viruses and could win multiple contracts for supplying them. Plus, the 89.3% efficacy suggests that, once shipped, its vaccine could take on Astrazeneca’s market.
All told, though, investors have already waited for months after other drug manufacturers booked revenue. By selling now, investors could have a lower tax bill from gains. They would also avoid any risks, should NVAX stock start to fall.
Silvergate Capital (SI)
Silvergate Capital has traded as low as $12.05 in the last 52 weeks. However, recently the stock has demonstrated a “triple peak” at over $150 on the charts. Now, though its Q1 results beat estimates, SI stock is ripe for selling.
For Q1, this name posted net income of $12.7 million, or 55 cents per diluted share. What’s more, its Silvergate Exchange Network (SEN) handled over 166,000 transactions, 84% higher than last year. Digital currency customer-related fees of $7.1 million are small for now. Yet, customer growth is soaring (Slide 3). SEN utilization will likely grow exponentially.
That said, SI stock has fallen sharply in the last month, failing to break out to new highs. Investors who did not sell at the top should look at exiting the position today. Not only could capital gains disappear, but gains booked later face higher tax rates.
Stocks to Sell on a Higher Capital Gains Tax: Tesla (TSLA)
As you probably know, the EV and clean-energy bubble popped not long ago. Because of that, Tesla shares fell slightly, but they held up compared to the others.
Trading as low as $152.66 in the last 52 weeks, TSLA stock is a home-run return for some investors. That said, Tesla posted a non-GAAP profit of 93 cents in Q1 but a GAAP earnings per share (EPS) of 39 cents. Automotive gross margins of 26.5% also barely beat the consensus.
In fact, if this name had not booked bitcoin profits and the sale of regulatory credits worth $518 million, its profits would have evaporated. Revenue from automotive sales rose by 75% YOY, so for profits to fall suggests that it does not have economies of scale.
On Tipranks, analysts currently have a price target of about $646 on TSLA stock. This bearishness signifies a lack of support of the stock’s current valuations. So, investors who have paper gains today should consider locking them in now. That said, after the new capital gains tax sends this stock lower, investors may want to buy it again at a better price.
On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Chris Lau is a contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get original insight that helps improve investment returns.