Tax loss selling hit list

This is one time of the year where it may pay to watch share prices closely because 'tis the season for irrational tax loss selling.

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.

Table 1 shows the current price in relation to the 52-week highs and lows for our entire Buy list. To take advantage of irrational selling, it's best to focus your efforts on stocks that have fallen and may be sold.

Key Points

  • Tax loss selling could create bargains

  • Smaller stocks more likely to be targeted

  • Keep an eye on these stocks

Continuing very low interest rates mean investors are willing to pay higher prices for stocks traditionally viewed as high dividend payers. This is why our Buy list doesn’t feature any listed property trusts or infrastructure stocks. 

Instead, it includes a few turnarounds, some financials whose fairly attractive fully franked dividend yields should grow nicely over coming years and two of the better stocks in the resources sector. 

Some examples

Although the ASX All Ordinaries Index has ‘only’ fallen by 2% over the past year, this masks the significant volatility seen over this period: in mid February 2016, the index had fallen 12% from its level at 30 Jun 15. We were able to take advantage of this volatility to add a number of stocks to our Buy list.

Helped by the market's recovery in recent months, a number of our Buy ideas have since been downgraded to Hold but there are still a few stocks on our Buy list within 10% of their 52-week lows. 

Table 1: The buy list vs 52-week high/low
Company Price at 20 Jun ($) 52-week low ($) % above low  52-week high ($) % below high
Amaysim 1.73 1.30 33 3.33 48
ASX 45.15 36.66 23 46.31 3
BHP Billiton 18.87 14.06 34 28.98 35
Computershare 10.22 8.92 15 12.81 20
Crown Resorts 12.99 9.80 33 14.07 8
Fleetwood 1.71 1.00 71 2.20 22
iCar Asia 0.865 0.59 47 1.09 21
IOOF 8.27 7.34 13 9.73 15
Myer 1.11 0.83 35 1.43 22
News Corp 15.85 15.35 3 21.98 28
Perpetual 42.81 37.25 15 51.94 18
PM Capital Global Opps 0.87 0.84 4 1.12 22
PMP 0.54 0.42 29 0.58 6
South32 1.585 0.87 82 2.45 35
Woolworths 21.38 20.50 4 29.22 27

With its structural challenges and miserly dividend, News Corp isn’t for everyone, particularly after what on the surface was a poor interim result. However, investors seem to be overlooking the fact that the company's performance was unduly influenced by currency issues – it reports in US dollars but much of its business is in Australia – and one-off costs. Whilst investors concentrate on earnings, we think the company offers compelling value based on a sum-of-the-parts valuation of its assets.                

With its share price 4% above its 52-week low, Woolworths’ challenges are well-documented and increased competition from the likes of Wesfarmers-owned Coles, Aldi and potentially Lidl is here to stay. In its favour though is that many of the company's problems are of its own making. New management appears to be making the hard decisions but the company's problems will take time to fix. As noted in Woolworths takes tough decisions, this is why we suggest dipping your toe in the water with an initial 2–3% portfolio weighting so you can take advantage of any further price falls.

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.  

A recent addition to our Buy list, Amaysim is one such stock, having fallen 48% from its 52-week high. This company leases mobile spectrum from Optus and resells it to subscribers, operating in a segment of the mobile market that is growing far faster than companies like Optus and Telstra which own and operate their own networks.

With its lower cost base, its strategy is to target mobile users who spend less than $40, customers that the bigger companies tend to ignore due to their lower profitability. Based on current metrics, Amaysim doesn’t appear cheap but if it continues to grow quickly, it could prove to be a profitable investment.

Resource companies BHP Billiton and South32, spun off from BHP Billiton a year ago, are also substantially below their 52-week highs. Like the index, their share prices had fallen even further earlier this calendar year but they've recovered along with commodity prices since then. Even so, they both remain 35% below their 52-week highs and could still be candidates for tax loss selling. Over the longer term, they’re also well placed as the resource cycle turns.

Similar to BHP Billiton and South32, Speculative Buy idea Fleetwood has also risen significantly from lows reached at the start of the 2016 calendar year but remains 22% below its highest share price over the past year. Whether our investment case proves correct depends on a successful revitalisation of its problematic RV business. It’s still too early to declare victory but as deputy head of research Gaurav Sodhi noted recently, initial signs are positive.

These stocks and others disclosed in Table 1 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 10% 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 10% 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.

Disclosure: Staff including the author own shares in many of the stocks mentioned in this article.

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