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Eight stocks to drop

Posted By James Dunn On In Markets,Shares | No Comments

With the late-year tumble in the stock market, many investors would be assessing their portfolios for an end-of-year clean-out.

Pruning a portfolio regularly is a wise thing to do: if a stock in your fund is performing poorly, or has become over-valued, there is absolutely nothing wrong with selling it.

It’s a good idea to keep track of whether stocks are over-valued (or under-valued) according to the consensus expectation of the broking analysts that follow the companies. To do this, I use the outstanding database of FN Arena, which requires a subscription: but it is a very handy tool.

If a stock strays too far from perceived fair value, it is very likely that the market will strip it back to a price closer to that level. Many investors use this market trait to take profits on stocks, and then – if they like the underlying business model – look to buy back in at a cheaper price.

On a combination of these grounds, here are eight stocks that could easily be pruned from a portfolio – some might justify re-purchasing at lower prices later on, like Ramsay Health Care; others, like Myer, offer no convincing reason to own them at all.

JB-Hi Fi (JBH, $19.60)

The speciality retailer has done a great job for its shareholders over the last 12 months, effectively doubling in value in terms of total return. Along with the other discretionary retailers, JBH has been bid higher by investors, who expect this group to deliver better-than-expected earnings in FY14. But discretionary retail is a very tough game at the moment, and with JBH about 11% over-valued on broker analysts’ consensus target price, it can fairly safely be moved on. A yield under 4% is not going to save it.

David Jones (DJS $2.75)

The hounds-toothed one is in a very similar boat. It has not been as strong a performer as JBH over the last 12 months, returning about 22%, but its three-year return (–9.6% a year) and five-year return (3.4% a year) should have worn out most shareholders’ patience by now. The incursion of international competitors both from the online channel and in bricks-and-mortar form – for example, Zara (Spain), Top Shop (UK), H&M (Sweden) and Uniqlo (Japan) – is only going to make things tougher for DJs, and the 5.7% forecast yield in FY15 is not enough reason to hold on to it.

Source: Yahoo

Myer (MYR, $2.52)

And the same goes for Myer, which famously has never traded above the $4.10 at which it was floated in November 2009, and now sits 38% below that price – with the stock needing a very strong Christmas. The stock has done well this year, generating a 22% return, but it needed to. Myer is not over-valued, but there’s no reason to bank on a strong Christmas trading period when the stock market is as skittish as it is.

Harvey Norman (HVN, $2.95)

Completing the retail sector’s group of woe is Harvey Norman, which is suffering from online competition in its core strength, branded technology products. The Australian business reported same-store sales growth of a meagre 2.9% for the first quarter of FY14. There is no reason to believe that HVN will get on top of online competition anytime soon, and as with JBH, there is no reason to own Harvey Norman on yield grounds.

SEEK (SEK, $12.58)

One of the ASX’s success stories in recent years, SEK has rewarded shareholders well, giving them 80% in total return over the last 12 months and more than 34% a year over the last five years. But, as often happens to strong performers like this, SEK is now over-valued. That’s no reflection on the quality of the online employment (seek.com) and training courses website, because if you really like the stock, you should be able to buy it back for less than it sells now. The FY15 forecast yield is 2.5%, so you’re not missing out on anything on that score.

REA Group (REA, $40.96)

Ditto for REA Group, which runs realestate.com.au and is the largest online aggregator of real estate advertising in Australia, attracting more than twice the traffic of its nearest competitor. REA Group also owns and operates Australia’s leading commercial real estate site, realcommercial.com.au. Investors who’ve owned the stock for five years have made 65% a year, but on analysts’ consensus, it is now even more over-valued than SEEK – by anywhere up to 40%. At 1.6%, the forecast FY15 yield is not a factor.

Source: Yahoo

Treasury Wine Estates (TWE, $4.64)

Treasury Wine had a tough year, revealing that it would have to destroy millions of litres of wine it could not sell in the US and taking a $160 million write-down as a result. The write-down cost managing director David Dearie his job and alerted investors to the consequences of wine over-supply and Treasury’s lack of pricing power. The stock has not done well enough to convince investors to stick with it, the yield has a three in front of it and the analysts’ consensus thinks it’s over-valued – enough said. The forecast FY15 yield, at 4%, is neither here nor there.

Ramsay Health Care (RHC, $40.92)

Ramsay owns Australia’s best portfolio of metropolitan private hospitals, has strong pricing power with heath insurance funds and is in a very good position for the future, as Australia’s population ages and health spending rises. The company is expanding overseas, and is consistently profitable. It has generated 35% a year for shareholders over the past five years. But it is now considered over-valued by the analysts that cover it, and it is likely that it could be bought back cheaper if you sold it now. A 2% forecast FY14 yield does not offset that assessment.

Tax issues to remember

Whenever you sell stocks from your SMSF, you need to keep on top of your capital gains tax (CGT) implications, and minimise the CGT.

In accumulation phase, the CGT rate of your fund is 15% – but the fund earns a one-third CGT discount if it has owned the shares for more than 365 days, to 10%. (If the shares are held in the pension account of the fund, there is no CGT on sales.)

If you have different parcels of a shareholding that have been acquired at different times and for different prices, you have to keep track of these ‘tax lots,’ since the capital gain (or loss) may be different for each. The shareholder can use this to their advantage, for example, selling a parcel they have owned for more than one year, to qualify for the discounted CGT rate.

In theory, you should be prepared to sell any stock you own, if it becomes over-valued; or if its business – and thus its earnings and dividend flows – comes under pressure for whatever reason. But in practice, the stocks that have become the core generators of income for many SMSF portfolios – the big four banks – don’t really come into this kind of consideration, because their strong dividend yields, augmented by the considerable benefits of franking credit rebates (partial in accumulation phase, full in pension phase) are far more important to the fund trustees than whether the actual share prices may have moved into over-valued.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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