One of the best times to invest is during periods of motivated (preferably indiscriminate) selling, where the other side’s motivations are removed from the underlying investment fundamentals. This occurs in various ways, from the occasional market sell-off to individual companies discarded for superficial reasons.
For Australian investors, June is an interesting month for this reason, due to the higher potential for tax loss selling, as well as so-called ‘window-dressing’ by institutional investors as the 30 June End of Financial Year (EOFY) nears. The difference is that June tax-loss selling is an annual and expected phenomenon, and is something that we believe investors ought to be prepared for.
For a number of holders of significantly under-performing investments for the fiscal year, there’s an incentive to sell prior to 30 June to realise losses to offset realised gains over the year and (all else being equal) reduce their tax liability. This has the potential to materially affect stock prices.
Window dressing for EOFY by institutional investors can also artificially influence shares prices. Essentially window dressers remove poor performing stocks and add high flyers to give the appearance of holding ‘winners’ in their portfolio. Our belief is that investment results matter far more than being seen to hold popular securities, however the incentive remains strong for some managers.
Understanding the potential for irrational activity leading to up 30 June can help us in a number of ways.
For example, if you hold a losing company for the fiscal year but remain positive about its prospects, you can avoid getting panicked and possibly be prepared to exploit irrational selling.
Or perhaps you’ve lost conviction in some loss-making investments. In such cases, recognising the loss close to 30 June makes a lot more sense than holding on, as you’ll be able to reinvest tax credits earlier (this is known as generating “tax alpha”).
And lastly, potential artificial price inflation of strong performers produced by window dressing may present especially favourable prices at which to take profits.
In sum, June can bring about weird activity that wouldn’t occur at other times in the year, and investors armed with a strong understanding of company fundamentals are well-placed to trade the short term anomaly for long term benefit. However, keep in mind that tax-loss selling is by no means a secret, so don’t count on opportunities even appearing or staying open for long.
Over the next few days we’ll be alert to potential indiscriminate selling, especially on the final day of the month when you might witness some feverish window dressing. To assist with finding tax loss selling ideas, the worst performers of the All Ords for the year are shown below.
Many of these names deserve their place in this list, however there’s a few we are more interested in with further share price declines.
As readers would know Aconex (ACX) is a company we’d like to own at the right price. The stock is near the top of the list with a whopping 57% share price decline from its peak this year, so a lot of holders are likely facing the tax loss dilemma. As per our view articulated in previous notes, we want ACX’s international growth options ‘de-risked’, and we think this happens at about $3 or below. The share price appears to be in a downward trend so we’re keen observers at this point.
Isentia (ISD) also makes the list with a 51% decline from its FY17 peak. We held this stock during the second half after it was oversold following two earnings downgrades. Recently we lightened the position after the stock strengthened on the back of a positive reception to its product upgrades during the 2H and rumoured interest from a potential acquirer. While our initial thesis played out we view ISD as risky on both the upside and downside. On the upside there’s a potential boost from the highly anticipated Storyview product, which will be released later this year, and on the downside ISD potentially faces strengthening competition over the long term, and this is a structural issue. We’d be more inclined to take profits in this case.
Another stock in the tax-loss selling zone is Automotive Holdings Group (AHG). AHG is interesting with further share price declines because the company is very likely to grow over the next 10 years. This is because it’s largest player in a highly fragmented market that’s ripe for consolidation, and should continue to grow via acquisitions. Due to stalling demand and tightening credit, weak vehicle sales may persist in the short term. We’d be interested below $3, which would imply slower growth than the company should achieve.
% change from high
|Seven West Media||SWM|
|Retail Food Group||RFG|
|Domino Pizza Enterprises||DMP|
|Ardent Leisure Group||AAD|
|Super Ret Rep Ltd||SUL|
Clime holds shares in AHG.