The stocks hit hardest by tax loss selling
Published 17-JUN-2023 12:00 P.M.
12 minute read
Here we are.
The final two weeks of June tax-loss selling.
Those wanting to exit a stock and holding out for newsflow or a liquidity event are probably getting to the point where time is running out.
Many people who invested at higher prices over the last 2-3 years, or are not long term holders and who have had enough will likely just take the losses and lessons and move on now.
Especially if they need to free up cash for life expenses (or increasing mortgage repayments) - small cap stocks are usually the first to go.
And June is generally seen as the optimal time to sell the stocks that are underwater to crystallise a tax loss.
Our theory is that this is the reason that a lot of small cap stocks (including some in our Portfolio) are currently dropping for no other good reason.
We think the selling we have been seeing during the May/June market weakness is NOT likely to do with the fundamentals of a company, but more to do with the personal financial circumstances and patience levels of its sprawling shareholder base.
This is the final part of the hangover from the bull market party in 2020 and 2021 - the time when you are just starting to crawl out of bed, and are thinking about ordering something on UberEats.
Around ~4 weeks ago (May 20th) we predicted that the first part of June would see small cap share prices under increasing downward pressure from tax loss sellers, but the “bargain hunters” might start arriving in the last part of June, to get ahead of a possible bounceback in July:
We are long term holders in our Investments, and we see May/June weakness roll around every year - we just hold on and wait for it to pass.
The last few trading days have felt like there is some life back in the small cap markets, especially in battery materials stocks.
We have even seen a few stocks delivering 100% and 200% kicks off low bases, often on positive drill results or an exciting new project acquisition.
So with some life looking like it may finally be coming back into small caps, today we are going to share a list of stocks in our portfolio that we think have suffered most from the June tax loss selling phenomenon this year.
We will check back in on these particular stocks in a few months and see how they have performed since what we think are the June tax loss selling lows.
This will be a good way to put our May/June small cap weakness theory to the test - obviously our theory requires us to speculate on the personal financial circumstances of thousands of individual shareholders, so we could certainly be wrong on this.
Here is the selection criteria and reasoning for this list of our stocks that we think are suffering most from May/June selling:
- Was trading at much higher levels in the last 24 months - we are inferring lots of (if not all) investors are now sitting on a paper loss.
- Has experienced an accelerated share price drop over May and June - we are inferring this is due to tax loss selling
- Has not delivered any disastrous news in that time to warrant a material share price drop - fundamentals have not changed
- Has announced progress on their project - fundamentals have improved
Here are the stocks in our Portfolios that we think have been most impacted by the tax loss selling based on the above criteria.
With no fundamental changes, we hope they can deliver a bounceback over the next few months from their current lows (we will check back to test this).
We will start with GAL, which we wrote about a couple of weeks ago.
We will use this same colour scheme to highlight in BLUE where shares had been trading higher over the last ~24 months, and ORANGE to show accelerated selling in this May and June.
NOTE: these charts are NOT showing from when we Invested or Increased Position. The purpose of the charts is to show where the last 2 years of trading has happened at a share price ABOVE where the current selling is occurring. This implies there is a larger number of shareholders who are showing a tax loss, increasing the probability of tax loss selling.
We are long term holders in all of the below stocks, and we are predicting a rebound if our theory on “downward pressure due to tax loss selling” is correct. We will check back on these stocks in a few months time to see if we were right.
Galileo Mining (ASX:GAL)
- Description: GAL is focused on expanding its nickel-PGE discovery in the Norseman region, WA whilst also chasing a large scale nickel discovery in the Fraser Range.
- Shares Held: 2,161,544
- Last traded price: 58.5c
- Our GAL Investment memo
Kuniko Limited (ASX:KNI)
- Description: KNI holds a portfolio of battery metals exploration assets (copper, nickel, and cobalt, lithium) in Norway. KNI recently added a Canadian lithium project.
- Shares held: 2,582,223
- Last traded price: 29.5c
- Our KNI Investment Memo
Evolution Energy Minerals (ASX:EV1)
- Description: EV1 is a sustainable, advanced stage graphite project in Tanzania.
- Shares held: 3,125,000
- Last traded price: 17.5c
- Our EV1 Investment Memo
- Description: WHK is a USA based cybersecurity company, providing cyber risk products, services and solutions.
- Shares held: 6,828,547
- Last traded price: 3.2c
- Our WHK Investment Memo
Euro Manganese (ASX:EMN)
- Description: EMN is developing a High Purity Manganese project in the European Union (Czech Republic) through the recycling of a tailings resource from a historical mine site.
- Shares held: 1,490,000
- Last traded price: 17.5c
- Our EMN Investment Memo
Elixir Energy (ASX:EXR)
- Description: EXR is advancing three projects, a coal bed methane gas project, a green hydrogen project, both in Mongolia, and a Queensland onshore gas project.
- Shares held: 2,795,000
- Our EXR Investment memo
GTi Resources (ASX:GTR)
- Description: GTR is an exploration company targeting uranium discoveries in Wyoming and Utah, USA.
- Shares held: 39,376,900
- Last traded price: 0.8c
- Our GTR Investment Memo
Tempus Resources (ASX:TMR)
- Description: TMR is an exploration company focussed on gold in Canada.
- Shares held: 9,398,000
- Last Price: 3.2c
- Our TMR Investment memo
Vulcan Energy Resources (ASX:VUL)
- Description: VUL is aiming to become the world’s first Zero Carbon Lithium producer to produce battery-grade lithium hydroxide from geothermal brines pumped from wells with a renewable geothermal energy by-product.
- Shares held: 118,650
- Last traded price: $4
- Our VUL Investment Memo
- Description: An early stage biotech research company that is developing a Phase III anti-inflammatory drug to treat a rare kidney disease.
- Shares held: 2,525,000
- Last traded price: 5.8c
- Our DXB Investment Memo
The examples above are all stocks that are trading at near two year lows, under further pressure from tax loss selling BUT have not announced any materially negative news, AND made progress on their projects.
We are hoping that once the tax loss selling season finishes we can see their share prices start turning back upwards. We will check back on the performance of this basket of stocks in a few months time.
We think the small cap market is pretty bad right now, but have a theory it might start to recover after June, or at least in the medium term.
So our plan has been to add a couple more new Investments while things seem at their worst.
We are planning a couple more new Portfolio additions in the coming weeks.
Further to this, there are likely some great companies out there that have also been punished in the small cap market turmoil.
Reply to this email if you know of any high quality small cap companies that have taken a significant share price hit over the last 12 months (especially over the last 5 weeks), despite making great progress on their projects.
Preferably trading at near all time lows... with:
- Excellent, trustworthy management team (with track record of success)
- High potential project (resources, energy, biotech or tech)
- Good, tight cap structure (stable top 20, low number of shares on issue)
- Cash in bank ($2.5M plus)
If it ticks all our boxes we will take a look at adding it this month.
Thanks to everyone who replied last week, we have been busy assessing all the suggestions and will reply to you shortly.
Mines and Money Melbourne Conference
A few of us attended the Mines and Money Conference at the Ritz Carlton in Melbourne this week.
Although none of our Investments were in attendance, it was a good opportunity for us to meet a few new companies and hear their stories, along with catching up with investors and other industry participants.
(and hopefully find our next portfolio addition that meets our current criteria).
We saw Chris Judd speak on the opportunities for the uranium mining industry with Guy Keller from the Tribeca Nuclear Energy Opportunities Fund.
Uranium is one sector that we are keeping our eye on for 2023 and beyond.
We recently wrote about the Uranium State in America, and our uranium Investment Okapi Resources (ASX:OKR).
The sentiment from Guy Keller from Tribeca was that underinvestment in uranium assets will lead to supply shortages as governments turn to nuclear energy to meet their net zero targets.
We also heard a keynote on financing critical minerals projects in Australia.
Most relevant to this discussion was our Investment FYI Resources (ASX:FYI), who has developed processing technology for High Purity Alumina and Mineral Sands (rare earths) in Australia.
The broad trend for funding projects at the “development” stage of the mining company lifecycle is that there is a strong interest from around the world for critical minerals projects, and the governments are willing to open the cheque book and provide favourable loans to projects with strong economics.
This sentiment was backed up this week with the WA government announcing a $1.9BN “green bond” to help finance projects aimed at getting Australia to Net Zero.
What we wrote about this week 🧬 🦉 🏹
Noble Helium (ASX: NHE)
We think the wave of capital pouring into Artificial intelligence (AI) will increase demand for semiconductors and, in turn, helium.
Large-scale AI is highly complex and requires extreme amounts of computer processing power.
Computer processing power requires physical computer chips - lots of them.
Helium is an “inert” gas (it doesn’t react with other chemicals used in the chipmaking process), and it is great at cooling things down (chip production creates a lot of heat).
NHE just raised $13.5M to drill and test its first well scheduled for next quarter, and purchase long lead items for its second well.
NHE is aiming to discover a globally significant prospective helium resource - and drill testing this is the first big step
If successful, NHE will be sitting on a helium project large enough to supply a decent chunk of future helium demand.
📰 See our full Note: NHE leveraged to helium demand growth as AI and microchip companies boom
Okapi Resources (ASX: OKR)
The USA wants a domestic uranium supply and a build out of enrichment capacity.
At the moment, US uranium production is non-existent. Russia and China control 63% of the world’s uranium enrichment capacity - not exactly the US’ best friends right now.
There is already US$37.5BN of money directly targeted at fuelling the US uranium and nuclear energy industries, with more in the pipeline.
One of the proposed US bills would see Russian uranium banned 90 days after its enactment.
To gain exposure to the US uranium theme, earlier this year, we Invested in OKR.
This week OKR put out a set of drill targets that it will be drilling at its North American uranium project next quarter.
📰 See our full Note: US rushing to secure uranium supply - OKR drilling next quarter
Quick Takes 🗣️
TYX: TYX locks in offtake
Macro News - What we are reading 📰
Big Pharma dealmaking recovers with $85bn M&A splurge (Financial Times)
Carvykti outperforms standard care as earlier line of therapy: Analysis (Myeloma Research News)
‘Future of cancer treatment’ has just been approved (The Australian)
Oil & Gas
USA plants continue to rely on foreign sources of uranium supply (World Nuclear News)
US-led minerals partnership shortlists projects for green energy shift (Financial Times)
⏲️ Upcoming potential share price catalysts
Updates this week:
- IVZ: Drilling oil & gas target in Zimbabwe, Myuku-2 (Q3, 2023).
- IVZ kicked off its 2d seismic acquisition program this week. See our Quick Take on the news here.
- MNB: Offtake agreement for its phosphate fertiliser project.
- MNB just signed an Engineering, Procurement, Construction and Management (EPCM) contract for its fertiliser project. See our Quick Take on the news here.
- NHE: Scheduled to drill two targets at its helium project in Tanzania (Q3 2023).
- NHE renewed its prospecting licenses in Tanzania, we covered the latest news from NHE, including its $13.5M capital raise, in a note here.
- TG1: Drilling at its NSW gold project in May.
- TG1 completed the acquisition of its NSW gold project. See the announcement on that news here.
No material news this week:
- TMR: Maiden JORC resource estimate for its Canadian gold project.
- DXB: Interim Analysis of Phase III Clinical Trial on FSGS (Q4 2023).
- GAL: Drilling at its Callisto PGE discovery in WA.
- KNI: Drilling 3/3 of its Norwegian battery metals projects in Europe.
- GTR: Maiden resource estimates across two of its uranium projects in Wyoming, USA.
- LCL: Maiden drilling underway at primary PNG copper-gold target.
- LNR: >10,000m drill program at rare earth’s project in WA.
- BOD: Phase III clinical trial for CBD insomnia treatment.
Have a great weekend,
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