Seeking Alpha
Long/short equity
Profile| Send Message|
( followers)  

Of all adages circulating on Wall Street these days, one stands out: "Sell in May and go away." Should investors stick with the adage?

Before we give an answer to this question, we should say a word or two about Wall Street adages. They are usually supported by historical evidence and can be explained by certain patterns of money flows to equity funds, e.g., corporate bonuses that boost savings and seasonal contributions to pension funds.

The problem, however, is that history doesn't always repeat itself, at least not in the same way, especially in a world where interest rates remain at record low and equities seem to be the default choice for investors who look for any meaningful returns beyond money market accounts and Treasury bonds. That's why I will remain skeptical this year about the "Sell in May and go away" adage, especially after strong April payroll data published last Friday that are a game changer for Wall Street.

Here are five trades I will consider:

1. Buy Homebuilders. A good employment report is very bullish for homebuilders, as it increases the likelihood of people buying homes. Besides, economic fundamentals for the industry have been improving: New home inventories are declining; homebuilder confidence is improving; home prices are stabilizing; and industry leaders like Toll Brothers (NYSE:TOL) have been reporting better-than-expected results. Conservative investors may want to buy an ETF investing in homebuilder stocks like SPDR Homebuilders (NYSEARCA:XHB) and iShares Dow Jones Home Builders (NYSEARCA:ITB), or buy the shares of diverse homebuilders like D. R. Horton (NYSE:DHI). Aggressive investors may want to accumulate the shares of individual homebuilders that have been taking steps to address the housing crisis early, like Lennar Corporation (NYSE:LEN), Toll Brothers, Standard Pacific (NYSE:SPF), and Honvanian Enterprises (NYSE:HOV) - though due diligence is recommended.

Company

Forward PE

Operating Margins

Qtrly Revenue Growth (yoy)

Earnings Growth (yoy)

Lennar

17.97

10.73%

36.60

284.40

DR Horton

17.33

7.0

40.60

139.40

MDC Holdings (NYSE:MDC)

16.55

3.28

58.10

--

Hovnanian

11.77

6.59

32.90

--

Standard Pacific

20.36

6.52

43.80

3,075

Source: Yahoo.finance.com

2. Buy Cyclical Stocks. An improving job picture is good news for cyclical stocks like Ford (NYSE:F), General Motors (NYSE:GM), Toyota Motor Company (NYSE:TM), and Honda Motor Company (NYSE:HMC). Aggressive investors may want to consider buying the materials and energy stocks like Walter Energy (NYSE:WLT), Cliffs Natural Resources (NYSE:CLF), and Oil Service Holders (NYSEARCA:OIH).

Ford Motor Company

Operating Margin

4.97%

Quarterly Revenue Growth

5.30

Quarterly earnings growth

-88.3%

Forward P/E*

7.95

Total Cash

$24.10B

Operating cash flow

$9.04B

*Fye Dec 30, 2013; Source: Yahoo.Finance.com

3. Stay Away Gold. A strong employment report diminishes the prospect of further QE by the Fed. This is certainly bad news for high-fliers like SPDR Gold Trust (NYSEARCA:GLD).

4. Stay with bellwether stocks with dominant market positions and solid financials, like eBay (NASDAQ:EBAY), Apple (NASDAQ:AAPL), Qualcomm (NASDAQ:QCOM), and Intel (NASDAQ:INTC), with dominant market positions that are well positioned to benefit from a rebound in consumer spending.

eBay vs. Amazon

Company

Forward PE

Qtrly Revenue Growth (yoy)

Qtrly Earnings Growth (yoy)

Operating Margins (%)

Return on Assets (%)

eBay

16.54

18.10

-62.10

20.74

5.67

Amazon.Com

73.64

22

-44.60

1.11

-0.49

Apple vs. the Competition

Company

Qtrly Revenue Growth (yoy)

Qtrly Earnings Growth (yoy)

Current Ratio

Operating Cash

Apple

11.30%

-17.90%

1.78

$55.26B

Nokia

-20.40

--

1.29

572M

BlackBerry

--

--

2.06

2.30B

Intel vs. Qualcomm

Intel

Qualcomm

Dividend

4.0%

2.20%

Operating Margins

27.44.30

30.78

Qtrly Earnings Growth (yoy):

-26.50%

36.00%

Qtrly Revenue Growth (yoy):

-3%

28.60

Source: Yahoo Finance

5. Sell U.S. Treasuries and Treasury ETFs like AGG, BND, LAG, and TLT. A stronger economy is bad news for Treasuries, especially at a time when they trade at record low yields.

Source: What To Sell, What To Buy, And What To Stay Away From This May

Additional disclosure: Active investor; may change positions at any time.