Tax loss selling: 2019 roadmap

Expanding on my wire on tax-loss selling earlier this week, in this wire, I look at the dynamics behind this phenomenon and nominate the 50 worst performing big-cap and small-cap stocks under pressure right now, along with some charts from previous years to show how big the moves can be. 

This can be a bittersweet time – but only if you sell late May & buy back in before July (that’s assuming you want to buy back in – in many cases sell & stay away). In the past whenever we see tax loss selling it usually begins early, as the instos move “ahead of the pack” and start their tax loss selling from late May. The more illiquid the stock – the greater will be its fall over June. So any illiquid stocks you want to sell – do it early, because everyone else comes in over June.

Many don’t think about this until early/mid June

• In May you are not thinking about tax time, but come June you begin to think – I’d better lock in those tax losses now before June 30.
• So over the years we tend to see many stocks (especially the illiquid ones) have really big falls that begin in late May & usually go until the second or third week of June.
• Many of these stocks bottom around then & then start what can be in some cases really big recoveries that go from mid/late June usually until the third week of July & then fizzle out.
• The tax loss stocks (biggest losers) are pushed by the brokers in early June & most investors like to make sure that they have sold them & received their cash well before the end of the financial year.
• As a result many sell their tax loss stocks over the first two weeks of June & sometimes into the third week of June – which sees these stocks really fall hard over this period.

Stocks usually bounce back hard from mid/late June

• From there - after big recoveries over the ensuing month - some will then sell off again, while others can hold those gains & keep going. The critical point is that the huge gains made over the three-week window is to some extent a liquidity event, whereby the massive selling that was sitting on a stock for a long period of time ceases completely & the stock spikes back.
• But for the stock to kick on - its fundamentals must be supportive, if they are not then the stock tends to resume its down trend ... Hence I’d look only at the buys or neutrals rated stock in this trade.
• Over the last week of June most of the tax loss stocks (except any real disaster stories that don’t recover) – then begin a bounce that tends to go from the last week in June to the second, sometimes third week in July.
• Over that time I have seen many stocks recover between +10% to +35% off their late June low.
• Quant studies have shown that stocks that fall -15% to -40% tend to bounce back +13% to +20% over the next few months.

If you are thinking of selling – then just do it

• If you are “thinking” of selling a stock for tax loss purposes – then go early & get it done as early as possible (May always a good time to get in early) before everyone else does late – and you can bet they will.
• A stock at 90c now could well be 80c in early June then 70c by mid June.
• If you don’t & hold back, the stock may fall a lot more than you thought & you then get sucked in at the worst time into exiting.
• If you are intending to get back in, then wait (until mid/late June) – the chances of the stock being a lot higher are very low, but the chances that the stock will be a lot lower are very high.
• So wait until mid June on & when the stock looks like it’s in free fall & everyone then wonders & they say ... “what is going on with that stock ? Stay away..”
• Many times – nothing – it’s just a massive amount of tax loss selling into a thin or illiquid market that his having huge market impact.
• Sometimes the company is forced to reply to the ASX & when (as most do at this time) – say there are no material issues – then the stock begins its violent recovery.

A key question you must ask yourself with EVERY stock ...

• One question I ask when someone asks “should I hold this stock – I’m losing on it?”
• I say - ask yourself this question ... Would you right now, at this price buy this stock?
• If answer is NO – then the answer is simple – they are ‘hoping” it recovers & if you wouldn't buy it here & are losing money – sell it.
• Don’t “average down on a loser” – if that’s the main reason – then there is a good chance it will only get worse.
• Once its gone out of your portfolio - I can guarantee (this is an added bonus) - your mental state gets better as well – because you don’t have to look at it any more.
• Out of sight - out of mind !!

They do recover in July

• Over the last 20 years, these tax loss stocks recover in June – quant studies show the big caps bounce back +1% in July.
• While in small caps that have fallen -5% then recover +2% in July.
• This list will dominate the stocks that will be under pressure.

Here are the 50 worst stocks for the 2018/2019 financial year (from 30th June 2019 to 31st May 2019) THAT will be under pressure ...

• Looking at both ASX 200 & Small Ords
• Just a few standout stocks that look to have been hit hard recently & should soon bottom from the tax loss selling - that I think should bounce hard over the next four weeks include ...

But for some of these the big rally to mid July (when it comes) could easily fizzle back out in Aug & beyond) ... bad stocks revert back to being ... bad stocks. Don't mistake the rally in some as these as a new beginning - it will simply be a dead cat bounce.

• Nufarm
• Adelaide Brighton Cement
• Costa Group
• Sims Group
• Syrah Resources
• Seven West Media
• IOOF (but get out of this mid July)
• AMP (but get out of this mid July)
• Pact Group (but get out of this mid July)
• Challenger
• CYBG
• Orocbre
• Pendal
• Flight Centre
• Bingo
• Lend Lease
• Dominos
• Boral
• Eclipx
• Link

There are many in that list above that are are not stocks I'd recommend - but they have been hit hard & tax loss selling seems to be driving many lower right now.

So most of these are simply short term trades & most you want (no MUST) to be out of them in mid/late July.

Source IRESS / Coppo Report

Here are some tax loss selling stocks & recoveries from June 2006 to show how this has worked in the past …

Flight Centre wow .. (was down -25% in 2005/06 & was a tax loss candidate - look at how it traded..

Source IRESS

Novogen (-51%)

Source IRESS

Telstra (-19% in F/y year to May )

Source IRESS

Gunns (-31%)

Source IRESS

TEN NETWORK (-20%)

Source IRESS

Get more insights from the insto desk in the Coppo report

This article is based on excerpts from The Coppo Report contributed to Livewire by Richard Coppleson, Director - Institutional Sales and Trading, Bell Potter. You can find out more by clicking here.

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