Return of the Savvy Yabby...

In a series of earlier wires:

The role of sentiment in iron-ore stocks

The savvy yabby (or, how I “know” when to adjust iron ore exposures)

Which stocks are most at risk of tax-loss selling?

US Stocks Vulnerable to Tax-Loss Selling

I introduced readers to a method for estimating the average cost of entry for investors in any stock. The method is one I developed 22 years ago when working as a quantitative analyst for a major global investment bank. In those days it was only made available to big funds.

After several years of stop-go attempts to bring this to market, the emergence of online blog platforms, like substack, with capacity to distribute direct to email content with embedded download links, has made it possible to provide a direct service to investors.

In this wire, I am happy to announce The Savvy Yabby Report is now on substack.

Attached you can find a summary for the top 20 Australian stocks by capitalization

The tax-loss selling season is severe in small caps

The approach of the tax-year end on 30th June typically sees stocks that have fallen some through the year experience further selling as the end of the year approaches. 

For this reason, it can be helpful to have estimates of the potential for tax loss selling by screening for those stocks most likely to have large unrealized losses.

I have written at length before about this effect, notably at the Livewire articles listed above or more recently over on my substack. In this wire, I give a simple overview of the condition in the market, which is likely to see significant tax loss selling in REITs and small caps, especially the critical minerals area of lithium, nickel and rare earths. This can be useful for two reasons:

1. Be prepared for a weak year-end in major tax-loss selling candidates
2. Be alert to trading opportunities for a rebound when that selling abates.

For starters, let us look at where the risk of tax-loss selling is small.

Looking at this we see that Goodman Group ASX: GMG is a standout winner. We expect that the investor sentiment in this stock is strong, with little prospect of selling into year end.

Contrast this position with Block Inc ASX: SQ2 where the average investor looks to be sitting on a 40% unrealized loss. Selling of this stock going into year-end seems likely.

Overall, the top fifty names look very positive.

Now let us look at the major banks in detail.

Aside from Bank of Queensland ASX: BOQ, the major banks are all positive. The unrealized loss estimate for BOQ is small at around 7%, so we do not expect major selling.

It is a different story for the REITs.

Unibail-Rodamco-Westfield ASX: URW and Abacus Group ASX: ABG are each showing an estimated unrealized loss of over 40% and are prime candidates for tax-loss selling.

Since URW is already quite cheap, this might set the stock up for a rebound in July-24.

When we look more broadly, at the top 650 or so stocks traded on the ASX with an average daily traded value of 100,000 AUD, or more, the picture is more mixed.

When market conditions are like this, we anticipate further returns divergence going into the year end. There will be stocks that are sold heavily to realize losses to offset gains.

This is very pronounced in the critical minerals sector.

The Lithium sector has been a world of pain for most investors in FY 2024.

The Rare Earth sector is in a similar position to Lithium.

Opportunity amongst the wreckage

While this time of year can be stomach churning to watch for those investors who are caught holding stocks that are under severe selling pressure, one should not lose sight of potential opportunity to come. Severe negative sentiment can severely distort investor perception of value. When all want to sell at the same time, rationality goes out the window.

Do consider the advice of your financial planner or tax adviser about what may be prudent to sell in order to minimize your capital gains tax liability, if you also had large gains.

However, give thought also to trawling through this market for potential bargains, once the current wave of selling abates. Normally this is the very last week of June, or the early part of July, once investors come back to the market with fresh eyes.

Tax-loss selling season when viewed through the lens of market psychology can be one of the very best times of the year to pick up bargains. Do be mindful that stocks that are down by a large amount often are so for fundamental reasons. No bounce is assured.

Do approach this period with some caution but have your thinking cap ready.

As the legendary Baron Rothschild was led to exclaim:

Buy when there's blood in the streets, even if the blood is your own.

I cannot think of a better summation of the tax-loss selling season.

For more thoughts on this, and other market opportunities head on over to The Savvy Yabby Report. I will be putting out more notes on Australian and Global markets, along with the downloadable screens that make it easy to analyse a large amount of data.

Until then, remember that the blue crustacean is your friend through the Ides of June.