The end of the financial year is closing in and this will put a number of stocks under pressure from tax-loss selling.
Selling stocks at a loss to offset capital gains is a long standing practice of both professional and retail investors as it also gives them an opportunity to strategically review their shareholdings as they enter the new financial year.
But it is not only their underperformance that makes some stocks ideal tax-loss selling candidates. Their medium term outlook tends to be also under a cloud.
Even if you thought the long-term prospects of a losing stock are good but think you can buy it back at a lower price over the next month or three, you should consider cutting it loose before June 30.
As I have flagged before, we are in a weak seasonal period for the overall market and I am not expecting any meaningful and sustained rebound till the fourth quarter.
While this isn't meant to be an exhaustive list, there are three stocks in the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) that I think would rank high on any tax-loss selling list.
Even if you do not own these stocks but were thinking about buying a position in what you think are bargains, you should hold off till after the tax year as I suspect they will stay under pressure in the near-term.
Metcash Limited (ASX: MTS): The grocery and auto parts distributor is the worst performer on the top 200 stock index with a 62% fall from grace thanks to its shock profit warning and suspension of its dividend for at least 18 months.
While a good case can be made for bargain hunters to buy Metcash as it wallows around a 14-year low with the potential spinoff of its Autobarn business being a likely catalyst for the stock, there are more reasons for shareholders to crystalise the loss now and look for a better re-entry opportunity.
There's still water to run under this bridge given the very tough environment for supermarkets and the resumption of its dividend payout in 2016-17, if not later, gives you plenty of time to buy the dip. I suspect the stock faces further downside risk over the short-term.
In the same vein, I think this makes Woolworths Limited (ASX: WOW) a potential tax-loss selling candidate as well as I think its turnaround strategy to win back market share will take more than a year to pay off.
Fortescue Metals Group Limited (ASX: FMG): The iron ore miner is up over 4% today but shareholders should be using the recent rebound as an exit opportunity.
As my colleague Mike King wrote, the iron ore price is likely to come under significant pressure over the coming months.
I think Fortescue's bounce is on borrowed time and the next down-leg in the commodity leaves the stock vulnerable to retest its six-year low.
Even if you had a more positive take on Fortescue than I do, there will likely be a better time to buy the stock in September or October as the mining sector tends to perform poorly during the winter months.
Shares in Fortescue have nearly halved in price over the past year.
Myer Holdings Ltd (ASX: MYR): The latest recovery in consumer and business confidence in the wake of the federal budget isn't likely to give the embattled department store much support as its issues are as much structural as they are cyclical.
Growing offshore competition and the online threat continues to weigh on sales and I think it will take a while before we see any light at the end of this tunnel.
At some stage investors will be attracted to the stock's undemanding valuation and 9% forecast yield (including dividend) for 2015-16, but the lack of an obvious nearer-term catalyst leaves this stock a likely tax-loss selling candidate given that it's shed a third of its value this year.
