Tax loss selling hit list

Value investing is a quest for inefficiencies. They can come in many forms, and among the most predictable and reliable is the annual culling of poor-performing stocks to generate tax losses to offset gains elsewhere in a portfolio. Stocks that have fallen during the year can come under brief, and sometimes intense, selling pressure.

To take advantage of it, you'll need to watch for price falls and act swiftly when you find them. To that end, as in prior years, we've compiled a watch list of stocks that may come under tax loss selling pressure.

The table below shows the current price in relation to the 52-week highs and lows for our Buy list. To take advantage of irrational selling, it's best to focus your efforts on stocks that have fallen and may be sold off. With the ASX All Ordinaries Index up 6% over the past year and 18% over the past two years, great buying opportunities are thin on the ground. That's why we only have eight stocks on our Buy list, with many that were on the list only a few months ago earning downgrades to Hold.

Stocks close to their lows

However, there are still a few stocks on the list within 10% of their 52-week lows. Two of them – IOOF and Monash – are full Buy recommendations, while the others – Adacel and FSA Group – are Speculative Buys.

IOOF has been under a cloud – along with most of the wealth management sector – due to the Banking Royal Commission and speculation over what might come of it.

No doubt there could be some impact on IOOF, but its wealth business is higher quality than those of the big banks and AMP, so we'd expect it to be relatively insulated. The wealth business it's buying from ANZ, however, will be directly in the firing line – but there's a reasonable margin of safety built into the price IOOF is paying and ANZ is providing indemnities for claims relating to pre-completion misconduct made within five years of completion.

It's also important to balance all this against IOOF's own share price and, with a price-earnings ratio of 16, and earnings growth over the next few years likely to be supported by the ANZ purchase, the stock looks attractive.

For its part, Monash's volatile month-to-month sales cause bouts of euphoria and pessimism. That's the opportunity. The stock is currently in a lull and just 5% above its 52-week low, but staying focused on the big picture – increasing rates of infertility among a growing population – reassures us that the horizon is bright. With a price-earnings ratio of 11 and dividend yield of 6.9%, we think we're being well compensated for the risks.

Stocks far below highs

There may also be opportunities in stocks which have fallen significantly from their 52-week highs, as this could also make them candidates for tax-loss selling.

Thorn Group leads the way here, with its price down 57% from its 52-week high – and its latest full-year result gives some idea as to why. Radio Rentals had a terrible year for new lease originations, offset by strong growth in the much lower-quality equipment finance business. But just as strong growth in equipment finance isn't necessarily a good thing (giving out finance is easy, getting it back is the hard part), falling originations in Radio Rentals isn't necessarily a bad thing. That's because of the big discount to net tangible assets, which is crystallised when cash comes in and isn't lent out again.

The stock is already in our Small Companies fund and we recently added it to our Equity Growth Portfolio. Any weakness from tax-loss selling may provide a further opportunity.

Adacel Technologies also offers potential, being 45% below its 52-week high. The price fall is the result of some director selling and a couple of key contract losses – which isn't a great look, especially when it happens in that order. We continue to have confidence, though, in the company's aviation software and the price fall recently earned it an upgrade back to Speculative Buy.  

These stocks and others listed in the table could be prime selling candidates as investors sitting on losses are tempted to realise them for tax purposes. Investors concentrating on the short term may sell them to offset capital gains elsewhere in their portfolios; those who are more patient should consider taking advantage of their shortsightedness.

The B list

For those that wish to examine opportunities outside of our Buy list, we've assembled a separate list. This spreadsheet lists stocks with a market capitalisation greater than $100m that are within 5% of their 52-week lows. If you're fishing for inefficiency, these are prospective waters.

Micro Caps

Finally, here is an additional spreadsheet listing stocks with a market capitalisation less than $100m that are also within 5% of their 52-week lows. It may also contain opportunities for members willing to do their own research.

There are no guarantees tax loss selling bargains will emerge but the spoils will certainly go to those who are prepared.

Note: The Intelligent Investor Equity Growth Portfolio owns shares in IOOF Holdings, Monash IVF, Thorn Group, TPG Telecom and Trade Me. The Intelligent Investor Equity Income Portfolio owns shares in IOOF Holdings, Monash IVF and Trade Me. The Intelligent Investor Australian Small Companies Fund owns shares in Adacel Technologies, FSA Group, Monash IVF, RPMGlobal, Thorn Group and Trade Me. You can find out about investing directly in Intelligent Investor and InvestSMART portfolios by clicking here.

Disclosure: The author has interests in all the above stocks through his holdings in all three portfolios.