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

With the ASX All Ordinaries Accumulation Index rising 14% over the past year and few sectors of the market out of favour, Buy ideas are thin on the ground. This is why we only have nine stocks and two listed investment companies on our Buy list, with many that were on the list only a few months ago earning downgrades to Hold. 

However,  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 16 Jun ($) 52-week low ($) % above low  52-week high ($) % below high
Adacel Technologies 2.36 1.91 24 3.55 34
Amaysim 1.90 1.62 17 2.29 17
Navitas 4.40 4.02 10 6.05 27
News Corp 18.44 14.76 25 19.96 8
PMP 0.71 0.53 35 0.88 19
Reckon 1.70 1.33 28 1.87 9
Thorn Group 1.30 1.12 17 1.96 34
TPG Telecom 5.59 5.33 5 12.93 57
Trade Me 4.83 4.16 16 5.70 15

Navitas partners with universities in Australia and overseas, preparing international students for their degrees. Universities benefit from receiving a steady flow of international students while the students themselves are eased into university life. At current prices, investors are paying a fair price for a very good business. 

TPG Telecom is only 5% above its 52-week low after its shares more than halved over the past year on concerns that the NBN rollout with impact its margins. We agree that its margins will be affected but nevertheless believe it and other asset owners will still earn higher, albeit reduced, margins than resellers. We also believe TPG's impending entry into the mobile market is a sensible strategy but our investment case to a great degree relies on management to execute. 

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.  

Adacel Technologies, the most recent additon to our Buy list, is an air traffic software business that has fallen 34% from its 52-week high after rising more than tenfold in recent years. With a wide moat protecting it from competitors and after having transitioned to a recurring revenue model, this good business is reasonably priced

Having also fallen around a third from its 52-week high, Thorn Group is another business that may be of interest. With regulatory fears and class action concerns, investors appear to be overlooking Thorn's market-leading Radio Rentals business

These stocks and others listed 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 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 Growth Portfolio owns shares in Amaysim, Navitas, News Corp, TPG Telecom and Trade Me. The Intelligent Investor Equity Income Portfolio own shares in Amaysim, Navitas, News Corp, PMP and Trade Me. The Intelligent Investor Small Companies Fund (which should be available for investment within the next few months) owns shares in Adacel Technologies, Amaysim, Thorn Group and Reckon. You can find out about investing directly in Intelligent Investor and InvestSMART portfolios by clicking here.

Disclosure: The author owns shares in Reckon and Trade Me.