The adage to “Sell in May and Go Away” is familiar to seasoned observers of the markets, the logic being that stocks do better from November through April than they do the rest of the year. Some analysts follow the adage to the letter, cashing out every May Day, moving into conservative fixed-income securities for 6 months, then repeating ad infinitum. And with defensible reason. According to The Stock Trader’s Almanac, since 1950 stocks have gained an average of 7.4% over the November-April period, in contrast to only .4% the rest of the year- a difference so pronounced that the trend seems worth capitalizing upon.
Random Quirk or Trend?
But is this just a random statistical quirk? Why aren’t gains more evenly distributed between the halves of the year? The most commonly given non-scientific reasons include “industrial production slows in hot weather,” which would be a suitable explanation if only the opposite phenomenon held in the Southern Hemisphere, which it doesn’t. Another, slightly more plausible reason is that, as people contribute to their IRAs late in the calendar year (and early in the next), they need to cash out their savings earmarked for retirement in order to do so.
Let’s not forget that selling one’s entire portfolio every late April and then finding another one in late October would not only tax one’s cogitation but necessitate plenty of transaction costs, enough to whittle away much of the discrepancy between in-season and off-season returns. Also, if the mid-spring cash-out is indeed a measurable and hence predictable trend, the market must already be anticipating it. If you’re halfway sharp about this sort of thing, why would you buy XYZ stock in late March when you can be reasonably sure that a glut of it will become available a month later, thus lowering prices?
Find the Outliers
That’s where any potential advantage to this strategy lies. If we can be somewhat confident that overall market returns will be modest over the next 6 months, wouldn’t it make sense to find the outlying stocks that are poised to defy the trend? Some stocks are bound to gain more than their counterparts that look to gain a piddling annualized .4%. What might those contrary stocks be?
Sam Stovall of S&P Capital IQ, the quantitative research arm of Standard & Poor’s, says the smart money goes into certain sectors at this time of year. In particular, building materials, the industrials and consumer discretionary areas. Let’s take a look at an archetypal company from each sector and see what the future might hold.
What to Trade
Birmingham, Ala.-based Vulcan Materials (NYSE:VMC) is one of the myriad unheralded companies whose core business is vital to the economy yet gets little recognition. Vulcan is America’s largest producer of aggregate- turning granite and limestone into gravel, crushed stone and other materials used for constructing houses, public works projects and everything in between. Vulcan makes products in a range of styles, and does so while garnering a reputation as one of the most admired companies in its sector. That being said, it’s stupendously overpriced (trading in the neighborhood of 350 times earnings) with a profit margin under 1% after years in the red. As for detecting a discernible flattening of its stock price in the supposedly lean months of May through October, there was a pronounced one in 2007. Vulcan reached its all-time zenith that April, maxing out at $124 before falling to $86 six months later, a level it hasn’t approached since. Factor in Vulcan’s current stock price, and the wisdom of moving out of the stock today seems consistent with history.
Philadelphia-based Comcast (Nasdaq:CMCSA) is as famous, or infamous, as Vulcan is obscure. (Generally speaking, you can assume that public perception of a company is less than positive if there exists a Wikipedia page entitled “Criticism of [company name].”) With a functional monopoly in many areas, the cable/internet service provider has little incentive to improve on customer service, which was rated worse than that of the Internal Revenue Service according to one study. In fact, the company’s monopolistic power has only increased in recent months with the February acquisition of New York-based Time Warner (NYSE:TWC), the only company of its kind that rivals Comcast in size. If approved by the Federal Communications Commission, whose chairman just happens to have run the cable industry’s largest lobbying firm, the newly fortified Comcast would boast a market capitalization bordering on $200 billion. Both companies profit margins are already in the 11-13% range, and with economies of scale (the merger would make the resultant company the largest cable/internet provider in most of the nation’s 10 largest metropolitan areas), it’s reasonable to assume even greater profitability in the future. Especially given how Comcast has bucked the trend of May-October flat-lining over the last several years.
Chicago-based Boeing (NYSE:BA) has been a staple of the Dow Jones Industrial Average for years- the definition of a legacy industrial stock. Synonymous with jet manufacturing, Boeing has received unwarranted albeit indirect negative press in recent weeks with the disappearance of one of its airliners – the 777-200ER that served as Malaysian Airlines Flight 370. Since the fated plane’s disappearance, Boeing stock has remained largely stagnant. But from April to November of 2013, Boeing rose 50%. It remains one of the Dow’s consistently successful companies, given that it has the United States passenger aircraft market largely to itself. Having recently finalized a $6.5 billion deal to provide Air Canada with dozens of new 737s, Boeing’s production will hardly be cooling off in the summer months.
The Bottom Line
Staying away in May might be a sensible recommendation for anyone who concentrates on index funds and other broad investments. But for those willing to dig a little deeper, and discern which stocks are overvalued and which undervalued, it’s possible to profit while everyone else is following folk wisdom.