Purging the portfolio: the shares that could make for handy EOFY tax losses
Independent Investment Research
In keeping with the pre June 30 EOFY vibe, this week your columnist opines on a few well known underperformers that arguably are worthy of being sacrificed on the altar of the fiscal fiend.
In other words: they’re unlikely to recover in a hurry and their best use is as a tax loss.
Investors who rode the market’s spectacular recovery from the depths of the pandemic are likely to be sitting on enormous gains, especially with anything pertaining to e-commerce.
They may well want to crystallise these windfalls, especially if they have held the shares for more than 12 months and are eligible for the 50% capital gains tax concession.
Sure, it might make sense to hold off selling until after 30 June. But given the arguably "toppish" market, a prudent strategy might be to take profits and square off with any losses.
So what are the ‘taking out the trash’ candidates? The answer, strictly speaking, could be any stock depending on when you bought them.
For instance, investors weighing into BNPL stunner Afterpay (ASX: APT) at a COVID low of $9 in March last year are more than 1000% ahead, but nursing a circa 30% loss if they bought at the peak of $158 in October last year.
Whether Afterpay is laughablY overvalued or a screaming buy is beyond our pay scale, frankly.
But some faves have been on the decline for years and the obvious starting point is former dividend milch cow Telstra (ASX: TLS), which isn’t exactly a small-cap but has shrunk over the years in valuation terms.
Investors flocking to the telco for its (now diminished) dividend yield have paid a hefty price in terms of capital value, with the stock down 32% over the past five years (albeit up 11% in the past 12 months).
Once the monopoly King of Copper, Telstra has suffered from the commodifying effect of the National Broadband Network, in that every telco pays the same price for wholesale access.
Competition in mobiles - a key strength for Telstra – isn’t getting any less intense.
So what about Sydney Airport (ASX: SYD), another yield favourite? The stock has actually fared quite well during the pandemic and has been steady over the last 12 months despite a $2 billion capital raising.
Still, its 30% off pre-pandemic levels and with international flights not resuming in a hurry this is a stock arguably not about to take off.
Again on travel, Qantas (ASX: QAN) chief Alan Joyce’s plea (or demand) for open borders is likely to fall on deaf ears in Canberra, given the pollies have sussed out that pulling up the drawbridges resonates well with their constituents.
Qantas stock is about 35% lower than pre-pandemic levels, albeit 60% higher on the five-year graph.
In the retail sector, Myer Holdings (MYR) has been an emporium of false hope for years now. A revered retail title, for sure, but then so were consumer names such as Fosseys, McEwans and Blockbuster Video.
In the half-year to 23 January 2021, Myer’s online sales grew 71% to $287 million, which sounds impressive. But e-commerce still only accounts for 20% of Myer’s total sales, which fell 13% to $1.4 billion.
Myer’s $266 million market cap is relative to its net cash position of $200m, so perhaps there’s value in the stock. But given the retailer’s large legacy and surplus bricks and mortar footprint, it could be time to consign this one to the tax time bargain bin.
Meanwhile, it’s questionable whether the fortunes of shopping centre landlord Scentre Group (ASX: SCG, formerly Westfield) will improve in a hurry, given the spectre of ongoing lockdowns, surplus inventory and the hard-ball negotiating tactic of tenants such as Premier Investments.
Scentre investors are underwater to the tune of 25% over two years and 39% over five years.
Another revered name, AMP (ASX: AMP) has titillated investors with takeover approaches and what new management promises to be an “inclusive, accountable, agile and performance-driven culture.”
Given the company’s “complex legacy issues”, a baptism of fire awaits new CEO Alexis George when she checks in on 2 August.
While there might be intrinsic value centred on the AMP Capital operation – also under new management – investors might consider cashing in their policy, so to speak.
Also in the wealth management sector, shares in the equally strife-prone IOOF (ASX: IFL) have lost 7% of their value over the last 12 months and 41% over the last five years.
IOOF’s big play was its $1.4 billion acquisition of MLC from the National Australia Bank. The share price has been weighed down because this purchase was funded by a $1 billion capital raising executed at a steep 24% discount ($3.50 a share).
In February last year IOOF acquired OnePath wealth pension and investment business for $850 million, so it may well emerge a winner of the banks’ stampede from wealth management.
But there’s plenty of housekeeping to go in the short term, which is why the stock is a potential tax loss (of course some investors strongly consider it a turnaround play)
While retails stocks have largely shone, Retail Food Group (RFG) joins Myer as a victim of Covid-19, but also a casualty of its own misdoings centred on the treatment of its franchisees.
The pandemic was OK for RFG’s Brumby’s Bakery outlet, but not so good for its coffee-and-a- sit down brands including Gloria Jeans, Donut King and Michel’s Patisserie.
Its wholesale coffee roasting business has also suffered from subdued café demand.
Investors who have held RFG stock for five years have lost 98% of their investment. While the company has since launched a “franchise first” charm offensive, it’s a long road back from here.
Online commerce hero Kogan (KGN) is a more contentious inclusion in our pre-June 30 ‘to do’ list because the company fared spectacularly during the pandemic.
As with Afterpay, it’s a case of when you bought the stock.
Investors have increased their money six-fold over five years and doubled it over two years, yet johnnies-come-lately who bought in a year ago are some 20% underwater.
Kogan’s May 21 update was less than impressive, with its guided full-year adjusted underlying earnings coming in at 11-18% below expectations.
Perversely, the online shopping boom has created inventory issues for Kogan which are likely to lead to deeper discounting and demurrage problems (port holding costs, not those pertaining to de marriage of Harry and Meghan).
With any tax-loss selling, investors may be tempted to sell out of stocks that – in their heart of hearts – they still believe in, with the intention of buying back in shortly thereafter.
The tax office’s “washing” rules frown on any transaction carried out with the sole purpose of minimising tax. Any decision to re-invest in the same stock has to be justified by an investment strategy.
Your columnist isn’t a qualified tax adviser, so will stop here.
Any decisions on holding or folding stocks depend on the investor’s individual tax circumstances – so it’s over to you, H&R Block.
Tim Boreham edits The New Criterion
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Many readers will remember Boreham as author of the Criterion column in The Australian newspaper, for well over a decade. He also has more than three decades’ experience of business reporting across three major publications.