I’ve had a lot of requests to do a newsletter on potential opportunities when it comes to tax-loss harvesting.
Not necessarily stocks you should be selling at this point in time, but stocks that should be on your radar because they’re being sold to book capital losses.
Why have I been a bit hesitant to produce a piece like this? Primarily because I believe this kind of thing can foster habits of short-term thinking.
Although I do believe one can take advantage of pressures in the latter months of the year to accumulate shares in companies for the long term, many deploy this strategy in an attempt to take advantage of short-term price movements.
In layperson’s terms, people think they’ll buy beaten-down stocks in December and realize large returns in January. This just isn’t the case.
The main thing investors are trying to capitalize on is the January Effect.
The January Effect is an anomaly where stocks that did poorly the previous year tend to rise in the first month of the year. This rally is supposedly driven by a rebound from tax-loss harvesting in December, where investors sold off underperforming positions to offset capital gains.
There is an issue with the January Effect, however…
While the January Effect is still a widely recognized event, its reliability has diminished substantially over the last couple of decades. What used to be a fairly predictable “pop” in the markets is now a completely unpredictable movement.
This is due to a few things. For one, the markets are much more efficient than they were 30 years ago. Technological advancements, rapidly evolving algorithms, lower transaction fees, etc., have all made it much easier for the market to accurately price stocks.
Secondly, there are a lot more tax-sheltered accounts now than there were 30 years ago. This makes tax-loss selling less prevalent.
Back in the early 90s, upwards of 70% of retail investor capital was in taxable accounts. The script is flipped today, with upwards of 75% of retail investor capital being in tax-sheltered accounts.
There are some small pockets of the market where the data still holds up in regards to that January “pop,” but they’re few and far between.
The January Effect might be dead, but taking advantage of tax-loss harvesting activity is not
Make no mistake, the quick trade is dead. If you are buying beat-up stocks expecting a quick 15% gain by January 15th, you are likely going to be disappointed, or you’ll simply get lucky.
However, the long-term value trade is very much alive. We are still seeing significant, artificial selling pressure on Canadian companies this month.
Some are outright bad businesses, don’t get me wrong. However, in many cases, they are solid, cash-flowing blue-chips that are being sold simply because a fund manager or high-net-worth investor needs a tax credit before December 31st.
This creates a price dislocation. A window where the share price detaches from the business reality.
So how do we take advantage? We aren’t trying to front-run a two-week rally. We are using this weakness to build positions in companies we want to own for the next 5+ years.
In this newsletter, I’ll go over some companies that are currently going through some selling pressure (and will likely continue to face selling pressure until the end of the year) that could be long-term adds. Two of them, both of which I will speak on below, will be the two stocks I invest in with my 2026 TFSA contribution room.
Constellation/Topicus (TSE:CSU) & (TSEV:TOI)
It has been a monumental year for Constellation and its spinoffs, and not in a good way.
Keep in mind, I’m going to combine the two companies in this segment, primarily because they’re going through the exact same issues/sentiment, given that Constellation is the parent company and majority shareholder of Topicus.
If you’ve been holding Constellation Software this year, you are seeing a large amount of red for the first time in a very long time. In fact, you could have bought this company in 2006, held it for 20+ years, and this would be the largest price swing you’ve witnessed.
You’re probably still not all that unhappy, though. If you did buy $10k of it in 2006, you’re sitting on a smooth $2.5M.
Topicus is a bit of a different story. It’s the “European cousin” of Constellation Software, trading on the TSX Venture, and the company is prone to a lot more volatility.
If you’ll notice with the chart of Topicus above, if you took advantage of fears during the 2022 bear market, at one point, you were up 300%~ off the lows.
I think the sell-off in Topicus and Constellation is based on fear, not fundamentals. In addition to this, the stocks became particularly popular after their runups in 2025, so we likely have a lot of investors underwater and looking to book some losses.
Let’s dig into why I think this is a long-term opportunity to accumulate both companies.
The Mark Leonard “panic” is overblown
On September 25, Mark Leonard resigned as President of Constellation for health reasons.
The market reaction was pretty brutal. It priced-in a complete collapse of company culture and capital discipline. It is a classic “Key Man Risk” discount. Look no further than something like Berkshire with Warren Buffett.
However, I think this is completely overblown.
The Board appointed Mark Miller as the new President. Miller isn’t an outsider. He is a 30-year veteran. He was the brains behind Volaris, one of the first acquisitions Constellation ever made.
The sell-off prices-in a collapse of acquisition success that is simply unsupported by Miller’s track record.
The “AI Moat” debate
The second headwind was Leonard’s final investor call, where he discussed the risk of AI eroding the “moat” of niche vertical-market software (VMS). Instead of being vague, like most CEOs would do, he told the truth. That he simply did not know.
The market took his honesty as a bearish signal, fearing that AI agents and “vibe coding” would ultimately cost Constellation some customers.
Again, something I believe is overblown.
Constellation’s businesses hold workflow data that is incredibly difficult to replicate. AI is far more likely to be a feature that Constellation/Topicus upsell to existing customers rather than a technology that causes mass churn.
While the market believes AI will be a headwind, I believe logical investors are accumulating here, proposing AI advancement to be a tailwind.
A large valuation reset has brought opportunity, in my opinion
We are looking at a valuation reset that we haven’t seen in years.
Constellation’s P/FCF has compressed to 20x. For a company growing as fast as Constellation does, this is an attractive valuation.
Constellation has had a sub-20x price-to-free cash flow multiple 3 times over the last decade. Returns from those time periods up until now:
April 2016: +700%
Jan 2019: +370%
Oct 2020: +160%
Don’t expect a quick rebound from this one. What will need to happen (and what I believe will happen) is the acquisition engine will continue on with Mark Miller at the helm, and the fears of artificial intelligence taking clients from this business will subside. In fact, I believe Constellation will be able to leverage artificial intelligence to increase its client base and the fees it can charge them.
TELUS (TSE:T)
If you’ve been a member the entire year, you’ll probably know I removed TELUS from the Foundational Stocks list, mentioning that the long-term outlook for telecom businesses really wasn’t all that strong.
However, I flipped that into a Dividend Bull List option, and I mentioned that valuations looked relatively attractive, and that I planned to buy this one and hold it for a much shorter period of time. I expected the increased levels of free cash flow to result in valuation multiple expansion.
This thesis was looking really good up until September. TELUS was up ~23% on the year, far outpacing the indexes. However, some fears about the company’s dividend being cut sent its stock price pretty much round-trip to where I bought it at the start of 2025.
It was a little frustrating, because I was well aware of the dividend problems the recent reports brought up long before the reports ever came out. So, I got the impression the market had priced these in.
TELUS fits the bill when it comes to tax loss harvesting
Telus has a substantial retail investor base drawn to its dividend history. Around 50% of the shares are owned by retail. Retail investors are more prone to reactive tax-loss selling in December compared to institutions that may spread activity out throughout the quarter.
In addition to this, retail investors care too much about the dividend. If there are any fears of a potential cut, they’ll sell their shares and head elsewhere.
However, contrary to the falling share price, Telus’s underlying engine is improving. The “capex cycle” is officially turning. What I mean by this is the company is going from a heavy investment cycle during the pandemic to scaling back capital expenditures and harvesting cash from those investments.
The dividend fiasco
In response to the negative reports on TELUS by The Globe and Mail (and a subsequent selloff in price), on December 3rd management announced a pause on dividend growth and the removal of the DRIP discount. The market initially reacted negatively, but I think this is bullish overall.
Paying a 9.5% yield while carrying debt is inefficient. By pausing growth until the yield falls (likely to the 5-6% range), Telus is prioritizing the balance sheet.
From current free cash flow levels, the dividend is still unsustainable. However, this is current free cash flow levels. The company expects free cash flows to come in north of $2.4B in 2026, and then grow at a 10% pace moving forward.
This means that the current dividend should be covered by 2027. This isn’t really the optimal scenario, but it’s kind of one I knew was the likely situation.
I do believe the company presents an attractive risk/reward right now
The current share price of ~$17.50 reflects maximum pessimism in my opinion. The “baby is being thrown out with the bathwater” due to a combination of things.
The first one being the fears of a dividend cut. However, the stock is down more than 25% from 2025 highs. Those highs were achieved right around when the rumors of the dividend being cut came out. It is likely a good chunk is already being priced in.
Secondly, the industry is just out of favor. BCE’s struggles combined with a dividend cut, now TELUS pausing dividend growth. Nobody wants to invest in this space right now. When sentiment is so poor, it often ends up being an opportunity.
And third, obviously the reason I’ve featured it in this newsletter, that being tax-loss harvesting potential. TELUS is heavily retail-owned, and I have no doubt people are dumping this one after many years of underperformance and booking the loss, especially with the potential of a dividend cut looming.
In regards to my own TELUS position, I won’t make the same mistake twice
As I mentioned before, TELUS is a short-term, speculative option for me based on valuation expansion.
I will admit, I got a bit too greedy during its runup in 2025 and should have booked profits. For a company I plan to hold long-term, a 20%+ runup in 6-7 months is irrelevant to me. However, for something I have held solely off the fact I believe there will be a short-term valuation bump, it was silly of me to not book profits on that exact short-term bump in valuation.
It goes to show how difficult it can be mentally to navigate the markets.
I will still hold TELUS. However, I am not adding at this point in time. This isn’t because I don’t think there is an attractive risk/reward situation here, but more so just due to allocations. If I had wiggle room in my portfolio, I’d have no problem adding.
Overall, these 3 options are ones investors could look to take advantage of
While the famous “January Effect” (buying in December for a quick January pop) is largely dead due to market efficiency and the rise of tax-sheltered accounts, taking advantage of short-term price dips over the long term is still a valid strategy.
We are not trying to front-run a two-week rally. We are using this temporary weakness to accumulate companies we want to own anyway.
For Constellation and Topicus, the resignation of Mark Leonard as President caused panic. However, his successor, Mark Miller, is a 30-year veteran and the architect of the Volaris operating group. The continuity is key here.
My entire 2026 TFSA contribution room will be headed towards these two companies, and I’m happy to do so at current prices.
Fort TELUS, the stock is priced for maximum pessimism. While I am not personally adding due to allocation limits, I cannot help but think that if the dividend can stay intact in 2026, we’ll have some room upwards. The difference? I won’t make the same mistake of holding onto my shares for too long. I’ll be booking profits if a runup occurs.
