Tax-loss selling is a phenomenon that's seen each June, which accelerates in the second half of the month.
The idea is that investors sell their worst-performing ASX shares before the end of the financial year arrives. They're willing to cop the capital loss to cancel out their tax liability from their wins.
This means that sometimes stocks that have already fared poorly during the financial year can spiral down even further in June, as demand plummets and supply soars.
And this could present some juicy bargains, according to a recent Market Matters report.
"[Tax loss-selling] can often send already depressed stocks down into oversold/deep value areas, which can be attractive for the well-informed investor," read the document.
"The key is determining the difference between value and a company simply in trouble."
As such, the report presented three examples of "quality" ASX shares that could see their valuations plummet but may present excellent opportunities to buy:
'Things are as bad as they can get'
ARB Corporation Limited (ASX: ARB) is a 4-wheel drive accessories provider, which has seen its share price plunge 46% since the start of the calendar year.
According to the Market Matters report, the company has been struck down by "a trifecta" of headwinds in the new car market — shortages of staff, supply chain constraints and slowing sales.
"When we combine this with margin contraction due to rising commodity [prices], the picture has looked bleak for ARB, which has clearly been reflected by its share prices fall."
But it's a retailer that Market Matters continues to like.
"It's starting to feel like things are as bad as they can get for ARB," read the report.
"It's now trading on 19.6x FY22 earnings compared to a 5-year average of 27.5x… This is one retailer we like into excessive weakness."
At the time of writing the report ARB shares were around $31, with the Market Matters team declaring it would pounce when it fell to $30.
The ARB share price ended Tuesday afternoon at $28.39.
Half the price it was a year ago
Medical and industrial glove maker Ansell Limited (ASX: ANN) has seen its valuation plummet 46% over this financial year.
The market has been disappointed with the company's post-COVID performance.
"Who would have thought the stock would be trading well under its 2020 highs in today's new health & safety world?" read the Market Matters report.
"January's major downgrade courtesy of rising cost and falling margins hasn't been forgotten — and for MM to be interested another leg lower is required."
The document advised that Ansell shares are already "fairly cheap" trading on 15.5 times price-to-earnings valuation but would prefer a tax-loss selling dip to under $23 before picking it up.
The stock finished Tuesday at $23.06.
'A quality, monopolistic business'
Real estate classifieds site REA Group Limited (ASX: REA) has made many investors wealthy over the past couple of decades.
But the stock price has suffered in recent months.
"REA has corrected 42% from its mid-2021 high and is currently down 35% for the financial year after finding itself in two unpopular naughty corners — i.e. property and growth high valuation names."
The Market Matters team reminded investors this is "a quality, almost monopolistic-style business", with "useful pricing power".
"But it currently is in the wrong place at the wrong time," read the report.
"The question is when has real value been restored – it's still not cheap per se, trading on an estimated valuation of 35.2x for 2022."
The Market Matters crew admitted they are still reluctant about increasing their exposure to the technology sector.
"But a little lower and it will become compelling… MM likes REA into weakness under $100."
REA closed on Tuesday at $103.44.
