Investors are likely to book some decent gains this financial year as stocks like A2 Milk Company Ltd (ASX: A2M) and Xero Limited (ASX: XRO) lead the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index higher.
But the laggards could face more pressure as we head towards the 30 June tax deadline.
This is due to tax-loss selling as investors dump some of their ugliest ducklings in their portfolios to offset their capital gains obligations, with investment losses from these underachievers.
It's not only their poorly performing share prices that make some stocks ideal tax-loss candidates, but also the lack of nearer-term catalysts to turnaround the negative sentiment.
These potential tax-loss candidates are stocks you don't want to buy, not until the new financial year at least. Even if you believed that these stocks are cheap, you might as well wait to buy them at the start of FY19 in a little over a month.
One of the top candidates for tax-loss selling is telecommunication giant Telstra Corporation Ltd (ASX: TLS). Increasing competition is squeezing margins and hurting profits. Investors are nervously waiting for the other shoe to drop – dividend cuts.
I think management won't provide any clarity on this front until after 30 June and this means the stock is likely to remain under a cloud till the new financial year kicks off.
Another stock that's likely to rank high on the list for tax-loss sellers is our largest wealth advisory firm AMP Limited (ASX: AMP).
Ongoing speculation that the group will be forced to split itself into pieces due to shocking revelations at the Hayne Royal Commission will keep buyers on the sidelines until FY19. Even if AMP can be kept whole, the industry is likely to face much higher levels of scrutiny and that's bad for any business.
Also, given that AMP is trading at a six-year low, there are probably plenty of investors who are under water and would be tempted to crystalise their losses.
In the same vein, you'd think that our largest mortgage lender Commonwealth Bank of Australia (ASX: CBA) will also be a prime tax-loss candidate. But that depends on when most investors bought into the stock.
Given that shareholders in the bank tend to have held it for a very long time, anyone who purchased the stock more than four years ago will probably still be sitting on a capital gain. I think CBA's sticky and loyal shareholder base will be its saving grace!
However, Automotive Holdings Group Ltd (ASX: AHG) doesn't have the same saving grace. The recent profit downgrade by the auto dealer has created a lot of confusion on where the gremlins in the business are hiding.
Even brokers who think the stock is still a buy on valuation grounds are scratching their heads and that is a very bad sign as far as I am concerned.
All businesses have issues and challenges. But when you don't know where the problem is, you are usually better off selling first and asking questions later.
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