Around this time of year, astute observers will notice that many stocks that have fared poorly over the preceding twelve months face additional selling from shareholders motivated to reduce their year end tax bill. The perverse incentive is created when a certain investor has crystallised capital gains throughout the year and therefore faces a capital gains tax bill. One way to reduce that tax bill is to sell losing investments by June 30, which ensures that the capital loss can be used to offset the capital gains made elsewhere.
As a result, some stocks that have already had a bad run face additional selling pressure in the last few weeks of the financial year. That certainly doesn’t mean these stocks will be good long term investments, and they are usually at least somewhat ugly, but it does mean that their share prices can be overly depressed around this time of year. Here are a few interesting candidates that I think might be suffering from tax loss selling.
Kip McGrath Education Centres (ASX: KME)
Kip McGrath Education Centres runs a network of tutoring franchises, largely in Australia and the UK (but in fact across a whole suite of Commonwealth countries). For almost two decades, it was run by the son of the founders, Storm McGrath, who was responsible for one major success (moving franchisees to a percentage-based fee) and several obviously terrible decisions.
The most recent bad decisions made by Storm was to expand into the USA, where the company has made perpetual losses ever since, and to build out a corporate store network, which risks competing with franchisees and is barely profitable at best, anyway. I recently bought some shares in KME simply because the board finally made way for a new CEO, Melinda Smith, who will commence some time in the second half of calendar year 2025.
Now, I’m very cautious of underestimating (once again) Storm’s tendency to destroy value for shareholders, and we won’t understand the specific extent of this talent until (at least) after the FY 2025 results are reported in August. Having said that, Smith’s LinkedIn shows an impressive corporate career which tends to imply she is a woman of deft ability. This contrasts with Storm’s LinkedIn which shows 25 years at his parents’ company and nothing else before it.
Kip McGrath could well be the victim of tax loss selling, given the share price chart below:
Camplify (ASX: CHL)
Camplify is an absolutely dirty dog of a stock, and I completely lack confidence in the leadership team, for reasons I explained in this article. On top of that, the CFO recently resigned, to be replaced by none other than the long-serving CFO of Kip McGrath, who hardly boasts an impressive track record!
That said, we have recently seen directors buying shares at over 50c per share, and the share price is being crushed by what I think is a combination of substantial shareholders Forager selling, and retail shareholders making sales motivated by tax reasons. I have zero respect for the Camplify CEO, but I do think that at the current price of around 30c per share, the business could easily become a takeover target.
In my mind, a serious operator could probably buy the business, sack most of the C-suite, and run it for a profit. It isn’t a stock I’d usually consider investible, but the very likely impact of tax-loss selling makes it a little bit tempting as a cynical and specualtive trade.
PWR Holdings (ASX: PWH)
I reckon PWR Holdings is the odd one out on this list, because it has quite a large market capitalisation of over $670 million. I won’t rehash the merits of this high-end cooling system manufacturer here, because you can find past coverage in both the Company Coverage, and Recommendations sections of the website.
As I covered when I issued my sell recommendation at slightly above current prices, I simply don’t have the confidence in management to back this stock as an official buy recommendation. My philosophy (having learnt the hard way) is that I must have full confidence in the leadership of any official buy recommendations.
That said, I could easily see PWH shares being smashed down due to tax-loss selling, given the horrible year it has had.
Why Do I Think About Tax Loss Selling?
In conclusion, the opportunist in me is often tempted to buy a stock simply because I think it is irrationally oversold. Sometimes, I have had quick success doing this, but I offer the ideas above partly just to inspire you to consider whether there are any stocks you’ve had your eye on regardless, temporarily suffering additional selling pressure.
I ask you: are there companies you know well and already liked, that might be irrationally sold down into the end of June? If so, it could be well worth watching them closely, and perhaps dipping your toe in if you sense they have become far too cheap. Be warned, however, that most of the companies being tax loss sold do have real problems, so they may not be great long-term ideas.
On the other hand; once in a while you get a real bargain in tax loss selling season!
You can see how EOL popped up at the start of July in 2023… in hindsight, this was likely because the share price had been depressed by tax-loss selling in June 2023. Unfortunately, we don’t get this kind of evidence until after the opportunity has passed.
Disclosure: The author of this article owns shares in KME and EOL and will not trade KME or EOL shares for at least 48 hours following the publication of this article. This article is not intended to form the basis of an investment decision and is not a recommendation. Any statements that are advice under the law are general advice only. The author has not considered your investment objectives or personal situation. Any advice is authorised by Claude Walker (AR 1297632), Authorised Representative of Ethical Investment Advisers Pty Ltd (ABN 26108175819) (AFSL 276544).
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