Why I think Telstra (ASX:TLS) shares could be ready to rally

The share price of Telstra Corporation Ltd (ASX: TLS) is wallowing at around a seven-year low but the out-of-favour stock could be close to surging ahead in the coming weeks.

That may sound counterintuitive given my bearish stand on our largest telco due to its eroding profitability from hungry competitors and the NBN, which makes Telstra one of the top tax-loss selling candidate, but that’s may be why it could be ready to pop.

Telstra is like a wound-up spring after its massive 36% crash over the past year when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index is up around 7%.

Bell Potter’s stock guru Richard Coppleson has noted that tax-loss stocks, which are underperformers that are sold before the end of the financial year to offset tax obligations, typically rally when the tax-loss selling abates.

These laggards usually underperform from mid-May when fund managers start culling the runts in their portfolio. Retail investors tend to only think about selling their tax-loss stocks in the final month of the financial year and are typically done by the second or third week of June.

From that point, these stocks bounce back as the selling pressure eases, according to Coppleson. But not all of these dogs can sustain their share price recovery.

“The critical point is that the huge gains made over the 3-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 and the stock spikes back,” he said.

This means stocks like Telstra could start rallying in the next week or two and could keep going till mid-July.

But that’s when the party is probably going to end unless management can trigger a re-rating event of some sort. As I’ve written before, Telstra could achieve this by announcing a much bigger cost cutting exercise when it hosts its Investor Day on 20 June or by splitting itself into two – where its infrastructure and network is housed in one listed entity and its sales division is vented into another.

It might not be a bad idea to buy Telstra ahead of its Investor Day. If management can’t pull a big enough cost saving genie out of its hat, the stock could still bounce for the reasons outlined above. Investors will just need to remember to sell the stock by mid-July.

If management does announce a game-changer, investors can hold on to their shares as the stock could start to re-rate.

Some other tax-loss candidates that Coppleson believes will rally include fund manager Perpetual Limited (ASX: PPT), hospital operator Ramsay Health Care Limited Fully Paid Ord. Shrs (ASX: RHC), and explosives and chemical company Orica Ltd (ASX: ORI).

But these aren’t the only stocks well placed to outperform. The experts at the Motley Fool are tipping another group of stocks to run ahead of the market in 2018 and beyond.

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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Telstra Limited. The Motley Fool Australia has recommended Ramsay Health Care Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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