ESPP Logic Check - company stock continues to dip

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Topic Author
coliver
Posts: 16
Joined: Tue Dec 29, 2020 11:40 pm

ESPP Logic Check - company stock continues to dip

Post by coliver »

Hope everyone's having a great holiday season!

My company IPO'd this year and we just had our first ESPP purchase this past week. I sold ASAP after shares settled in my brokerage to lock in the gains, and this will continue to be my strategy since I vest RSUs quarterly as well. What I want to get all of your thoughts on: as an investment strategy, should I continue putting money into my ESPP when the stock only continues to dip?

*For role transition purposes, I intend on staying through at least the first half of 2022 even though I am concerned about our long-term growth potential. That said, I don't think we're in danger of going belly up or my job being in danger as I'm a consistently high performer relative to my peers. It just isn't the rocket ship we were promised.

Background investments:
I currently max out my 401k and (backdoor) Roth IRA, and contribute 40% of my post-ESPP paycheck to my taxable brokerage (SCHB). No interest in a HSA since we have great PPO and I frequent the doctors. I max out my ESPP contributions.

Some numbers to put things into perspective:
  • Contributing about $700 after-tax per paycheck to ESPP (ouch, about 24% of my after-tax paycheck)
  • 15% discount off the lower stock price, which would either be the beginning of offering period or on the plan purchase date
  • Allowed to sell (disqualifying disposition) as soon as shares settle in our brokerage account, 1-2 days after purchase
  • FMV purchase date = $28.34
  • Discounted price (15%) = $24.6415; total purchased $3375.89
  • Sold @ $27.50/share; total sold $3767.48
  • Effective capital gains = 11.6%
My thinking is that, while the actual capital gains is less than the discount due to the stock volatility/decline, it's still a significant gain as opposed to investing in SCHB for the same period - around 6% in 6mo (which would be my alternative, index funds all the way). I can afford the after-tax hit, though it psychologically doesn't feel good knowing I'm pouring more money into a declining stock. However, since there's a generous lookback period, I still expect to come out net positive since I'll sell 1-2 days after receiving the 15% discount off the lowest price.

Questions:
1. Knowing my current investments and investment strategy (index funds, slow but steady growth), should I continue contributing to the ESPP and selling immediately after?
2. If not, what are other investments I should consider with the extra money?
3. Any blinds spots I'm not seeing?

Many thanks to the community! It's been an anxious period at work because of the volatility.
bloom2708
Posts: 9861
Joined: Wed Apr 02, 2014 2:08 pm

Re: ESPP Logic Check - company stock continues to dip

Post by bloom2708 »

As a rolling buy/sell I would keep doing the ESPP.

It is self funding after the first quarter.

I do not think you are missing anything.
AnEngineer
Posts: 2414
Joined: Sat Jun 27, 2020 4:05 pm

Re: ESPP Logic Check - company stock continues to dip

Post by AnEngineer »

I don't see why you'd ever not so ESPP if you can sell quickly, can manage the cash flow, and there's no appreciable risk that the stock will drop by more then the discount by the time you sell.
KRP
Posts: 225
Joined: Thu Aug 27, 2020 11:56 am

Re: ESPP Logic Check - company stock continues to dip

Post by KRP »

coliver wrote: Wed Dec 01, 2021 6:48 pm Hope everyone's having a great holiday season!

My company IPO'd this year and we just had our first ESPP purchase this past week. I sold ASAP after shares settled in my brokerage to lock in the gains, and this will continue to be my strategy since I vest RSUs quarterly as well. What I want to get all of your thoughts on: as an investment strategy, should I continue putting money into my ESPP when the stock only continues to dip?

*For role transition purposes, I intend on staying through at least the first half of 2022 even though I am concerned about our long-term growth potential. That said, I don't think we're in danger of going belly up or my job being in danger as I'm a consistently high performer relative to my peers. It just isn't the rocket ship we were promised.

Background investments:
I currently max out my 401k and (backdoor) Roth IRA, and contribute 40% of my post-ESPP paycheck to my taxable brokerage (SCHB). No interest in a HSA since we have great PPO and I frequent the doctors. I max out my ESPP contributions.

Some numbers to put things into perspective:
  • Contributing about $700 after-tax per paycheck to ESPP (ouch, about 24% of my after-tax paycheck)
  • 15% discount off the lower stock price, which would either be the beginning of offering period or on the plan purchase date
  • Allowed to sell (disqualifying disposition) as soon as shares settle in our brokerage account, 1-2 days after purchase
  • FMV purchase date = $28.34
  • Discounted price (15%) = $24.6415; total purchased $3375.89
  • Sold @ $27.50/share; total sold $3767.48
  • Effective capital gains = 11.6%
My thinking is that, while the actual capital gains is less than the discount due to the stock volatility/decline, it's still a significant gain as opposed to investing in SCHB for the same period - around 6% in 6mo (which would be my alternative, index funds all the way). I can afford the after-tax hit, though it psychologically doesn't feel good knowing I'm pouring more money into a declining stock. However, since there's a generous lookback period, I still expect to come out net positive since I'll sell 1-2 days after receiving the 15% discount off the lowest price.

Questions:
1. Knowing my current investments and investment strategy (index funds, slow but steady growth), should I continue contributing to the ESPP and selling immediately after?
2. If not, what are other investments I should consider with the extra money?
3. Any blinds spots I'm not seeing?

Many thanks to the community! It's been an anxious period at work because of the volatility.
For (1) the actual capital gains (or loss) tends to be small...the discount itself mostly lands on the W2 as Ordinary Income.
sidwin516
Posts: 172
Joined: Fri Feb 26, 2021 1:46 am

Re: ESPP Logic Check - company stock continues to dip

Post by sidwin516 »

i'm always confused about the 18 month holding period for taxes purposes. i always thought it was a year and day to go to long term but if u do that with espp u get hit for the discount given.

so when are the taxes paid on the discount? i'm guessing in that year u are receive the espp. So what is the additional taxes if u sell before 18 month offering period has expired?

as for the original question.... always buy the max. sell it the same day if you don't want to hold it. taxes on 15% gain is a good problem to have especially if you have a 2 year look back....
Topic Author
coliver
Posts: 16
Joined: Tue Dec 29, 2020 11:40 pm

Re: ESPP Logic Check - company stock continues to dip

Post by coliver »

bloom2708 wrote: Wed Dec 01, 2021 7:47 pm As a rolling buy/sell I would keep doing the ESPP.

It is self funding after the first quarter.

I do not think you are missing anything.
Thanks for the advice, bloom2708! Clarifying Q: what do you mean it's self-funding after the first quarter?
AnEngineer wrote: Wed Dec 01, 2021 9:20 pm I don't see why you'd ever not so ESPP if you can sell quickly, can manage the cash flow, and there's no appreciable risk that the stock will drop by more then the discount by the time you sell.
Yeah, that's what I was thinking. This first time, by the time I sold, I was only able to realize 11% gains. That said, it didn't drop below the discounted price and was still better than what I'd see in the market via index funds. My concern was, if the stock price continues to drop, should this impact my decision? Thinking not since I'd still get a discount off whatever's the lowest price at the purchase date.
KRP wrote: Wed Dec 01, 2021 9:46 pm For (1) the actual capital gains (or loss) tends to be small...the discount itself mostly lands on the W2 as Ordinary Income.
Agreed. It was only a couple hundred bucks in capital gains this time, but trying to be mindful if there's a higher yield alternative to ESPP.
sidwin516 wrote: Wed Dec 01, 2021 11:07 pm i'm always confused about the 18 month holding period for taxes purposes. i always thought it was a year and day to go to long term but if u do that with espp u get hit for the discount given.

so when are the taxes paid on the discount? i'm guessing in that year u are receive the espp. So what is the additional taxes if u sell before 18 month offering period has expired?

as for the original question.... always buy the max. sell it the same day if you don't want to hold it. taxes on 15% gain is a good problem to have especially if you have a 2 year look back....
The discount is added to my W2 as ordinary income, so will be taxed as normal come April. Since I sold without holding a certain period––I forget our policy but have no interest in holding ESPP––the capital gains will be taxed as short-term gains.
inbox788
Posts: 8372
Joined: Thu Mar 15, 2012 5:24 pm

Re: ESPP Logic Check - company stock continues to dip

Post by inbox788 »

coliver wrote: Thu Dec 02, 2021 12:17 amYeah, that's what I was thinking. This first time, by the time I sold, I was only able to realize 11% gains. That said, it didn't drop below the discounted price and was still better than what I'd see in the market via index funds. My concern was, if the stock price continues to drop, should this impact my decision? Thinking not since I'd still get a discount off whatever's the lowest price at the purchase date.
Short answer: agree with other comments that say keep doing what you're doing

So you didn't realize the 15% discount or any additional gains, but even with fall in stock price, you still beat the market? Nearly 12% vs 6%; double the market return? What's not to like? The regular investors in your company aren't happy, but some believers would load up more if it keeps dipping. And they're all buying without a discount at full market price.

If the stock does continue to dip, even though you don't think so, your job may be at risk, and that risk goes up the more the stock dips.

It looks like you get the benefit of a lookback, so if the stock rebounds big in a cycle, you might get a big bonus.

There is a small chance the dips get bigger > 15%/year and repeat over multiple years, you wind up with a loss. It's a low probability, and the benefits worth the risk IMO.
AnEngineer
Posts: 2414
Joined: Sat Jun 27, 2020 4:05 pm

Re: ESPP Logic Check - company stock continues to dip

Post by AnEngineer »

coliver wrote: Thu Dec 02, 2021 12:17 am The discount is added to my W2 as ordinary income, so will be taxed as normal come April. Since I sold without holding a certain period––I forget our policy but have no interest in holding ESPP––the capital gains will be taxed as short-term gains.
Technically, the discount is not a capital gain, it is wage income. Some of the discount can become LTCG with a qualifying disposition, but that involves selling after one year from purchase and two years from grant date.
AnEngineer
Posts: 2414
Joined: Sat Jun 27, 2020 4:05 pm

Re: ESPP Logic Check - company stock continues to dip

Post by AnEngineer »

inbox788 wrote: Thu Dec 02, 2021 4:32 am There is a small chance the dips get bigger > 15%/year and repeat over multiple years, you wind up with a loss. It's a low probability, and the benefits worth the risk IMO.
OP will gain money as long as stock doesn't drop more than 15% in the day or two between purchase and sale.
ryman554
Posts: 1635
Joined: Sun Jan 12, 2014 8:44 pm

Re: ESPP Logic Check - company stock continues to dip

Post by ryman554 »

coliver wrote: Thu Dec 02, 2021 12:17 am
bloom2708 wrote: Wed Dec 01, 2021 7:47 pm As a rolling buy/sell I would keep doing the ESPP.

It is self funding after the first quarter.

I do not think you are missing anything.
Thanks for the advice, bloom2708! Clarifying Q: what do you mean it's self-funding after the first quarter?
It's called "budgeting".

You spend $700/check for the ESPP. three months (on average) later, you get back $700* # of paychecks + 15% (assuming you sell same/next day). What are you going to do with that money? Since all money is fungible, then I posit that you
a) mentally take the 15% gain off the top and go do whatever you do with money
b) mentally take the rest and apply it to the $700/month for the next ESPP.

Et, voila. You have just funded the next round of ESPP with the return on investment in the previous round, so you can now do something else with the $700/paycheck for the next six months.



Aside, as to your other question, this is virtually a guaranteed >60% ROR on your money. <15% gain over 3 months average holding time>. I challenge you to find a guaranteed ROR in that ballpark.
Topic Author
coliver
Posts: 16
Joined: Tue Dec 29, 2020 11:40 pm

Re: ESPP Logic Check - company stock continues to dip

Post by coliver »

Thanks everyone - confirming that I'll continue to contribute to my ESPP max 15%!
ryman554 wrote: Thu Dec 02, 2021 10:24 am
coliver wrote: Thu Dec 02, 2021 12:17 am
bloom2708 wrote: Wed Dec 01, 2021 7:47 pm As a rolling buy/sell I would keep doing the ESPP.

It is self funding after the first quarter.

I do not think you are missing anything.
Thanks for the advice, bloom2708! Clarifying Q: what do you mean it's self-funding after the first quarter?
It's called "budgeting".

You spend $700/check for the ESPP. three months (on average) later, you get back $700* # of paychecks + 15% (assuming you sell same/next day). What are you going to do with that money? Since all money is fungible, then I posit that you
a) mentally take the 15% gain off the top and go do whatever you do with money
b) mentally take the rest and apply it to the $700/month for the next ESPP.

Et, voila. You have just funded the next round of ESPP with the return on investment in the previous round, so you can now do something else with the $700/paycheck for the next six months.

Aside, as to your other question, this is virtually a guaranteed >60% ROR on your money. <15% gain over 3 months average holding time>. I challenge you to find a guaranteed ROR in that ballpark.
Nitpicky question - where'd you get 60% ROR calculation? The average holding time is actually 6mo, since we have ESPP purchases 2x a year. Since we just IPO'd, there was a bit of an exception with this shortened window.
AnEngineer
Posts: 2414
Joined: Sat Jun 27, 2020 4:05 pm

Re: ESPP Logic Check - company stock continues to dip

Post by AnEngineer »

Average holding time is 3 mo, since you put in over six. Some is in for 0mo, some for 6.
toast0
Posts: 337
Joined: Fri Dec 12, 2014 12:41 am
Location: Puget Sound

Re: ESPP Logic Check - company stock continues to dip

Post by toast0 »

coliver wrote: Thu Dec 02, 2021 12:17 am Yeah, that's what I was thinking. This first time, by the time I sold, I was only able to realize 11% gains. That said, it didn't drop below the discounted price and was still better than what I'd see in the market via index funds. My concern was, if the stock price continues to drop, should this impact my decision? Thinking not since I'd still get a discount off whatever's the lowest price at the purchase date.
There's no index fund out there that's going to give you a 15% discount on a publicly traded equity with a two (or so) day holding period. The share price more or less doesn't matter, as long as it doesn't fall 15% during the time between when the purchase price is set and when you can sell. If price movement is random, you should have some purchases where the price goes up and some where it goes down and over many purchases average out about 15% extra w-2 income on whatever you can put in the plan, with just a little bit of effort. From experience with ESPP and RSUs at large tech companies, there may be some amount of price movement from employees selling; if possible, it can help to get your orders in towards the beginning of the trading day if shares are added after hours or soon after they become available if they're added during the day. Subject to your company trading policies, of course: some companies have company wide trading windows, and all companies prohibit trading if you're in possession of material nonpublic information. If there's a risk of ESPP purchases happening during a closed trading window or while you are in possession of material nonpublic information, that means you may have a longer holding period and more risk.
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