Sell in May and Go Away: Good Advice?

Wall Street is littered with cliche statements aimed at imparting subtle wisdom.

• Markets climb a “wall of worry” and usually slide down a “slope of hope.”
• Bulls make money, Bears make money, but pigs get slaughtered.
• Cut your losses and let winners run.

And today’s most applicable statement is to Sell in May and Go Away. The statement basically comes from statistical studies which have proven the “October to May” period to have stronger gains than the Summer doldrums. There are plenty of explanations for this… The wall street brokers may spend the summer relaxing in the Hamptons instead of calling prospects. Investors may use more capital for leisure than for investments. Or it may be that businesses grow more quickly in winter months as managers hunker down and get work done.

The main question to us as investors is whether to just take the summer off, or stay involved in the markets? Now believe me, I would love to spend the summer pushing the twins around in the stroller and watching Braves games with my 9-year old. But honestly, with a little discipline and foresight, this summer could turn out to be one of the most profitable times for us here at ZachStocks. The following are some themes which will likely shape the character of our markets in the coming months:

Alternative Energy

We have been a bit early to the party with this sector. Unfortunately, the global economic crisis put the need for alternative energy solutions on the back burner as governments struggled to prop up financial systems which were in danger of crashing. But whether the recovery comes quickly, or takes a process of several quarters, the focus will likely return to this important investment category.

Alternative energy has the benefit of being backed from not just an economic standpoint, but also from a political and social perspective. The Obama administration still expects to create a significant number of “green collar” jobs as initiatives for wind, solar, and other alternative power are put into place. Across the globe, governments are requiring stricter emissions regulation and generating more electricity from sources other than fossil fuel.

This past week, First Solar, Inc. (FSLR) reported that costs are decreasing to a point where it makes much more economical sense to install solar panels for energy consumption. The stock ran up sharply, and optimism is beginning to spread to other stocks trading in the same or similar industries. This summer I expect attention to revert back to alternative energy both politically as well as economically.

Investment names to consider in the alternative energy names include First Solar, Inc. (FSLR); LDK Solar Co., Ltd (LDK); Yingli Green Energy Hold. Co. Ltd. (YGE) and Energy Conversion Device (ENER).

Inflation

It should come as no surprise that with the government printing massive amounts of paper currency to shore up banks' balance sheets and bail out failed businesses, that this currency will eventually lose some of its value. Now up to this point, the lack of economic growth has saved us as the dollars have been used simply to pay down debt instead of stoke an economic recovery.

But looking further down the road, inflation is certainly a concern and could become disastrous if the Fed continues to run the presses at breakneck speed. As investors (and really as consumers, workers and citizens) we want to protect the spending power of our wealth much more than just the dollar amount of our savings. This will likely become more difficult in the coming months once some economic stability is seen.

In order to combat inflation, the best course of action is to own “stuff” that retains its value regardless of what currencies are doing. Now it may not be feasible for you to load up your basement with grains, stuff gold under the mattress, and stockpile guns in your attic (I’m not sure I really agree that things will be that bad), but there are some investment decisions that can be made which can protect your spending power, and quite possibly increase your real wealth over the coming months.

Precious metals come to mind first and if you have a plain vanilla brokerage account it is very easy to invest in GLD and SLV (ETFs which trade in lockstep with Gold and Silver prices). You can also own an ETF geared toward agricultural commodities such as DBA. Finally, I think an investment in Intrepid Potash, Inc. (IPI) could lead to out-sized gains as agricultural producers look to Potash fertilizer as a way to increase yields.

Growth At a Reasonable Price

Growth At a Reasonable Price (or GARP) is an over-used phrase on Wall Street. The idea is that growth stocks are only attractive if you don’t have to pay out the nose to own them. It can be extremely disappointing to find a company that is performing exceptionally well, and then realize that to own them you must pay 45 times earnings. There are times when buying growth stocks at nearly any price can yield strong trading gains. But in today’s market, buying at inflated prices is just asking for trouble.

Despite the sour mood carried by many growth stock investors, I have actually found quite a few attractive opportunities with reasonable prices. The key is understanding exactly what forces are driving long-term growth, and figuring out the variables that could represent risk. Once you have a clear understanding of how a particular business works, what the long-term plans are, and what challenges could get in the way, you have the necessary pieces to develop a simple reward to risk ratio. High stock prices by nature beef up the risk side, so it is important to either buy low, or have a very strong outlook for the long-term prospects.

Lately we have been able to pick up several quality growth stocks at attractive prices. Some names that we have discussed here at ZachStocks include Amedisys, Inc. (AMED), Allegiant Travel Company (ALGT), and First Cash Financial Services, Inc. (FCFS). More opportunities will undoubtedly arise both as a function of prices being pushed lower as well as companies showing unexpected growth.

Consumer Underperformance

The final theme for this summer carries a more disappointing tone. Regardless of when the eventual economic recovery occurs, consumers have been shell-shocked and will not be quick to discount the lessons learned in the past 12 months. Over-leveraged personal balance sheets have left many in an uncomfortable financial position. Families who lived paycheck to paycheck found out just how risky this lifestyle is when they lost part or all of their regular income.

So even as the government creates jobs and desperately tries to stimulate economic activity, the average consumer is likely to begin increasing the amount of money put towards saving or paying off debt. While this activity will likely yield tremendous strength in years to come, it can be very difficult for companies who currently rely on consumer spending to keep them in business.

We have outlined several short opportunities in the past few weeks which have the potential to trade sharply lower due to their high price and questionable growth in this weak environment. Consumer specific names include Buffalo Wild Wings (BWLD), Rosetta Stone Inc. (RST) and American Public Education, Inc. (APEI).

In conclusion, this summer should offer some exceptional opportunities for traders and investors alike. The key is to operate a disciplined approach and pay close attention to how trends are progressing. Buying inflated prices is dangerous, but opportunities exist in sectors that many consider non-traditional or overlooked.

Disclosure: Long FSLR, YGE, ENER, IPI, AMED, ALGT, FCFS.

Comments

[Mad Hedge F...:]

This one will work this year. You’ve just had the best two month run in 30 years. It’s time to sit down and smell the roses. Go climb that Alpine peak you’ve always wanted to attempt, finish off that basement, or take the misses down to Cabo. Maybe your nine iron needs some work. Whatever. There are no decent risk/reward trades in the market right now. All of my long recommendations, like emerging markets, commodities, crude, and junk bonds, are through the roof. My shorts have cratered, with the 30 year Treasury bond futures down a whopping 20 points, from 142 to 122. All of my longs are way overbought, and my shorts are oversold. I can’t in good conscience ask traders to just sit on big unrealized profits. Never slap a double in the face, especially in this environment. Nobody ever got fired for taking a profit. Always leave the last ten percent for the next guy. There is no law that says you have to trade every day of the year. Better to reestablish at better prices, like in August. If you strapped on any of these trades, the first four months of 2009 gave you a great year. If you didn’t, don’t break your back playing catch up. It’s not worth it. As for me? I’m going down to Vegas to shop for condos at ten cents on the dollar and do some actual gambling.

May 02 06:40 PM

[LilBob:]

One area I'd like to add to the fray, if you're able-bodied and looking for a solid investment right now is rental property. I'm still not convinced that housing prices have bottomed out yet in all markets but if you're good at sniffing around for the sharp deals you can pick up single family homes and even duplexes at a very good price. You just have to be sharp-know what to look for when you inspect the property, get all the numbers and make sure you can cover the mortgage, taxes and a nest-egg for future repairs with realistic rental rates. Also, if you're going to get into this kind of an investment you have to keep it local and be willing to put in some sweat equity. You'll never make money in rental property if you have to hire contractors to maintain the place for you.

May 02 06:59 PM

[Zachary Sch...:]

MHFT - Thanks for the advice... while it sounds great and I certainly hope to get the 9 iron out at least a few times, your comment makes me consider buying LVS :-) Hope you have an awesome summer and get a great buy on some property.

LilBob - I've got some rental property and I think you're right for the long-term. I would caution to make sure you are adequately capitalized before making a rental purchase. Expect some time here and there with no tenants and make sure you can carry the property even if it doesn't rent for quite some time. Personally, my one tenant just lost his job which makes the situation a lot more interesting...

Freya - an interesting thesis for sure. I certainly expected this rally to last beyond the one or two weeks the talking heads had called for, but am getting a bit uncomfortable with extended long positions now. Maybe I'm not alone - if so then your argument makes a lot of sense. But it seems to me people are getting a bit too comfortable for my liking.

At any rate, there will be plenty of opportunity on an individual security basis. I disagree with Mad Hedge Fund Trader and think you can always find good risk-reward trades if you look hard enough.

Thanks for the comments guys!
Zach
zachstocks.com

May 02 10:00 PM

[pocono:]

well LVS IS OPENING A NEW CASINO IN BETHLEHEM, PA SHORTLY, BETWEEN PHILLA AND THE POCONOS IN THE OLD BETHLEHEM STEEL BUILDING. I SEE LVS RAISING UNTIL THE OPENING. JUST THE OTHER DAY WHEN CASINO STOCKS WERE UP, LVS WAS UP TWICE AS MUCH


On May 02 10:00 PM Zachary Scheidt wrote:

> MHFT - Thanks for the advice... while it sounds great and I certainly
> hope to get the 9 iron out at least a few times, your comment makes
> me consider buying LVS :-) Hope you have an awesome summer and get
> a great buy on some property.
>
> LilBob - I've got some rental property and I think you're right for
> the long-term. I would caution to make sure you are adequately capitalized
> before making a rental purchase. Expect some time here and there
> with no tenants and make sure you can carry the property even if
> it doesn't rent for quite some time. Personally, my one tenant just
> lost his job which makes the situation a lot more interesting...
>
>
> Freya - an interesting thesis for sure. I certainly expected this
> rally to last beyond the one or two weeks the talking heads had called
> for, but am getting a bit uncomfortable with extended long positions
> now. Maybe I'm not alone - if so then your argument makes a lot of
> sense. But it seems to me people are getting a bit too comfortable
> for my liking.
>
> At any rate, there will be plenty of opportunity on an individual
> security basis. I disagree with Mad Hedge Fund Trader and think you
> can always find good risk-reward trades if you look hard enough.
>
>
> Thanks for the comments guys!
> Zach
> zachstocks.com

May 02 11:07 PM

[WACG:]

The Fed can print all the money they want ... even until we run out of paper ... but that does not create inflation. "Printing money" only can cause inflation when it is loaned. In other words, if you have a veritable mountain of newly printed dollars they do not contribute anything until those dollars get into the hands of people via borrowing. There is not much borrowing going on and there will not be for several to many quarters.

May 03 10:39 AM

[Scooter-Pop:]

Wild Card Concern with Israel taking ACTION in Iran, in May.

May 03 11:16 AM

[Emerald:]

Fools and their money are easily parted. Let's look at the current economy. Earnings are down and will say down for the next two quarters. Ther is basically no new lending tking place and the velocity of money is down. Deflation rules as companies and consumers deleverage. This bear market rally is based on thin air and no real breath from the pro's. Banks and hedge funds are manipulating the day trading trying to outguess each other. Job losses are continuing and home prices are falling. Commercial real estate will now be the headline and it is downright ugly! Yes, opportunities are available in gold and shorting the long Treasury bond. Stocks can be had for a cheaper price this fall when investors realize the game has changed for the next decade or two and dividend yields must surpass 5% on intermediate bonds for buyers to come back. If you must buy stocks, look at China and the FXI. For myself, I am long GLD, integrted oil companies, Ginnie Mae bonds, inetrmediate investment grade corporates and muni's. Cash is in the SHY (1-3 year Treasuries at 32%). I am also short the Dow, the QQQ and the S&P. Am I talking my book - absolutely.

May 03 11:35 AM

[Alphameister:]

Many individual speculative issues have had huge two-month gains, and many of those appear as mere blips on long-term charts. I am still able to find plenty of stocks with very attractive reward-risk ratios. The "sell in May" adage historically has not applied to a market rallying powerfully from deeply oversold lows. This market is often compared to that of 2002-03 when stocks likewise staged exceptional early gains from the March '03 lows. The rate of gain slowed during the summer months, followed by accelerated gains toward year-end. We could see a similar pattern in 2009.

May 03 11:51 AM

[j baker:]

So, you are suggesting shorting rosetta stone??? They are reporting earnings on may 5th. they have doubled sales during the recession...and you are suggesting shorting them??? I have this to say, i see rosetta stone as one of the next big breakouts. i see multiple splits during a run up to 40 to 60 dollars a share with only 6.25 million shares outstanding...

May 03 05:37 PM

[Old Trader:]

Scooter,

You may be right, of course, but I also recall that a miltary strike by Israel against I ran was being mooted last fall, as well....the logic being that the Bush administration would be less likely to take Israel to task, than an incoming Democratic administration


On May 03 11:16 AM Scooter-Pop wrote:

> Wild Card Concern with Israel taking ACTION in Iran, in May.

May 03 09:34 PM

[capt Brian:]

I would think that now is the time for hunkering down until the mkt tells you what to do. Being first in line is usually putting you in front of the herd about to run, and will trample you. I would pay down all debt, if you HAVE to invest in something, put it in single premium def'd annuities with a good ins company like Met life with NO mtg exposure, NO commercial RE no nuttin but mutual funds which are showing dividends not losses.
But you go shopping and good luck, I cannot tell you how I wish you are right in buying RE now. I wish you'd buy mine at a "fair price", not one at a fire sale. (I'm not selling nor buying RE now)

I am buying gold, silver, ammo, freeze dried foods, and charcoal filters for nice water.

Am I another nut, well, I sure hope so. I hope u and Obamma are doing the right things, but I see dire consequences ahead.


On May 02 06:59 PM LilBob wrote:

> One area I'd like to add to the fray, if you're able-bodied and looking
> for a solid investment right now is rental property. I'm still not
> convinced that housing prices have bottomed out yet in all markets
> but if you're good at sniffing around for the sharp deals you can
> pick up single family homes and even duplexes at a very good price.
> You just have to be sharp-know what to look for when you inspect
> the property, get all the numbers and make sure you can cover the
> mortgage, taxes and a nest-egg for future repairs with realistic
> rental rates. Also, if you're going to get into this kind of an investment
> you have to keep it local and be willing to put in some sweat equity.
> You'll never make money in rental property if you have to hire contractors
> to maintain the place for you.

May 03 11:40 PM

[James Wilson:]

Keep shorting American Banks until the only banks are Eroupean !!
Is that what you really want?

May 04 01:26 PM

[Zachary Sch...:]

Emerald: You bring up a good point with the velocity of money. Up to this point we have had very little velocity, but the problem is that once the velocity ticks up even just a little bit, the sheer AMOUNT of currency created could be a big problem. The Fed can't just pull money out of the system quickly and quietly. Inflation doesn't take long to breed in these conditions.

Alphameister: It's been interesting to see exactly WHICH issues have had the strongest gain. Bespoke had an interesting piece which showed that stocks with weaker relative strength over the last 12 months actually rallied the most. This could certainly indicate a dead cat bounce (we need quality stocks to keep us going). At the same time, performance anxiety continues to push us higher and could eventually lead the fundamentals to follow the market in recovering.

Capt Brian: If it gets that bad, I want a spot in YOUR compound :-) and if you're right, then there's probably very little that a strong investment approach would do for any of us. I certainly hope we're not facing an Armageddon type scenario.

Thanks guys for your comments - definitely keeping it lively!
Zach
zachstocks.com

May 04 05:30 PM

[Stock alot:]

Are We Reliving the 1982 Scenario?
By Corey Rosenbloom
Could history be repeating itself directly? Might there be an exact roadmap to follow as it relates to the current stock market trajectory? If only it were so easy, but I did want to highlight some eerie similarities in the charts you might want to as it relates to the end of the 1982 Bear Market in what was called the "Melt-Up" action. Let's take a look and see if we might be reliving the "1982 Melt-Up Scenario".

May 05 02:41 PM

[Freya:]

Zach: The market do their best to confound the most.

The 'Whatever" you want to call it, has increased Bearish Calls for an immediate decline.

Many of those Bearish calls are by Bulls who have missed the move. There are No Caveats.

The Market has a chance to Gore both Late to the Party Bulls and Bears.

To see how different this move has really been is to take a Look at the NYSE Breadth graph in Barron's.

May 03 12:25 AM

[Freya:]

"Sell in May and go away" Will Not work this year.

Why? For the very reason that Mad Hedge cites: the Market has been up sharply in the past 2 months and the the above adage is being Pushed by the Bears who now see News which should crater the Bulls, reaming the Bears instead.

"My shorts have cratered." Translated, I have hung on to my shorts through the entire move because I do not believe in it.

In the Sept. thru Nov. Falling Knife mode the Bulls said the very same thing, December had a rally which failed in January as the onslaught continued. The Bulls capitulated, its hard for them to reverse course. The Bears like Mad Hedge, are still calling it a "Trap"

Another Short Squeeze is coming. NYSE Market breadth has topped every trap seen before.

"Sell in May and go away", those expecting this would have sold in April.

May 02 09:05 PM