Looking to put capital to work in this new financial year? If so, you might be interested to know that the worst-performing stocks in June may be this month's best.
A number of studies have found that the most unloved stocks in the last month of the financial year tend to outperform regardless of how badly or well the broader market held up in June.
The key reason for this is tax loss selling. Investors are often forced to clear the deck to crystalise losses for the tax year and this means they are often inclined to throw out stocks that have hit a rough patch to offset capital gains liabilities even though the longer-term outlook for these tax-loss selling candidates isn't dire.
The latest research from Morgans confirms the finding as the broker found that in eight of the past 10 years, the bottom 10% performing stocks in June are in the top 10% of outperformers in the first week of July.
Further, the average return for this group in the first week is an impressive 4.6%.
Stock traders could make a killing, but this seasonal behaviour also throws up opportunities for longer-term investors.
It's little surprise to see a number of high profile underperformers' taking the wooden spoon in June. These include Flight Centre Travel Group Ltd (ASX: FLT) following its profit downgrade, mining contractor Bradken Limited (ASX: BKN) as it struggles with debt and a weak outlook, and grocery distributor Metcash Limited (ASX: MTS), which is losing market share to better placed rivals – just to name a few.
The trick here for investors is to work out which of the dogs are under cyclical pressure and which are facing structural issues.
Cyclical headwinds refer to normal ups and downs of an industry or sector, while structural issues are more sinister as it refers to a problem with a company's core business.
For instance, the threat of online video streaming on free-to-air TV operators is structural and it's no surprise to see Nine Entertainment Co Holdings Ltd (ASX: NEC) and Ten Network Holdings Limited (ASX: TEN) near the bottom of the ladder in June.
The cyclical versus structural issues are not mutually exclusive. While some would think that Flight Centre is a potential rebound stock that longer-term investors should buy as the profit downgrade is part of the ongoing business cycle, I think its downgrade is as much a structural issue as it is cyclical.
There are probably only two stocks among the dogs of June that I think represent a buying opportunity for investors. This is port and freight company Qube Holdings Ltd (ASX: QUB) and food and beverage franchisor Retail Food Group Limited (ASX: RFG).
Qube had to downplay its earnings forecast for 2015-16 due to weak demand for freight from mining clients but the business is leveraged to other parts of the economy and the strategic value of its Moorebank intermodal terminal makes this an ideal stock to buy on dips for the longer-term.
Meanwhile, Retail Food Group has been slammed after it warned that it will have to take an $18.5 million writedown of its underperforming bb's Café and Esquires Coffee franchise.
But its other brands are doing well and it has a clear expansion path ahead to keep profits growing over the medium term, and I think the stock will rebound to over $6, if not higher, in the coming months.
Looking for other stocks to buy now? Sign up below to get your free report on the best income stock to own this financial year from the experts at the Motley Fool.
