4 Large Caps That Typically See Sizzling Seasonality Through August

by: Todd Campbell

"Just as the seasons change, so does investment sentiment toward various stocks and industries. The patterns and trends, which would seemingly be widely known and acted upon, repeat over and over and can be exploited by confident investors willing to research when stocks tend to rally and falter."

- Your Guide to Better Stock Picks: Tips from an Advisor's Advisor

By Todd Emerson Campbell

The timing of buys and sells is one of the biggest challenges facing investors. In tracking the seasonal price history of individual stocks, portfolio managers often identify trends before they develop.
My firm, E.B. Capital Markets, LLC, has compiled one of the most robust databases of seasonality. And, since our founding in 2003, seasonality has been a key component of our research methodology. Seasonality remains one of our most popular products with portfolio managers. And, because big money is integrating seasonality, individual investors should be spending more time considering it too.
This month is presenting a number of opportunities for investors looking to buy seasonally strong stocks on sale. The typical summer sell-off is well underway and all four of these stocks are trading down from their 52-week highs. Each of these stocks has finished August higher than it starts May in every one of the past five years, suggesting these stocks offer investors a compelling argument to buy.
Davita Inc. (NYSE:DVA): Up five of the past five three-month periods ending in August with an average 8.29% return. Davita operates dialysis centers throughout the United States, serving end stage kidney disease patients with necessary treatment. It is trading at 14x rising 2012 consensus EPS estimates and has beaten Wall Street estimates in three of the past four quarters. The Street has boosted its 2012 earnings forecast to $5.93 from $5.53 30 days ago. The company generates $407 million in levered free cash flow.
The Sizzle: According to the National Institutes of Health some 527,000 people in the United States are undergoing treatment for chronic kidney disease as of 2007. The agency estimates 11.5% of adults 20 and older have evidence of chronic kidney disease with the most significant cause of renal failure coming from diabetes and hypertension, two highly prevalent diseases challenging our healthcare system. About 111,000 new cases are identified annually, and spending on treatment, both public and private, is $35 billion. Over 338,000 people receive treatment in centers such as those operated by Davita, which owns roughly 30% market share. The services provided by Davita are necessary given the 10 year survival rate for those with end stage renal disease is 10.2%. As commercial insurance enrollment returns to growth, patient mix will help boost Davita's bottom line.
Glaxosmithkline (NYSE:GSK): Up five of the past five three-month periods ending in August with an average 8.35% return. The company makes pharmaceuticals and vaccines to treat a variety of diseases including asthma, heart disease cancer, hepatitis and tetanus. The company is trading at 10.7x 2012 consensus estimates, has $10.9 billion in cash on its balance sheet and generates nearly $13 billion in levered free cash flow. The stock currently yields 4.9%.
The Sizzle: GlaxoSmithKline slogged through the past decade with high single digit returns on its R&D program. The company expects its current pipeline will lift those returns to low double digits over the coming years. In part, thanks to pushing future development toward high margin biopharma products. Currently, the pipeline has roughly 30 late stage products, 15 of which should finish Stage III trials by the end of 2012. At the same time, Glaxo is reigning in costs, having reduced its headcount by 28% over the past four years. Emerging markets offer considerable upside sales growth. In 2010, emerging markets sales rose 22%. Given the amount of pandemic flu vaccine it sold in 2010, the company's results are currently challenged by tough year-over-year comparisons. These comparisons ease as the year progresses. The company also plans to sell non-core OTC products and distribute the proceeds to shareholders later this year.
Pepsico Inc. (NYSE:PEP): Up five of the past five three-month periods ending in August with an average 4.42% return. Pepsi makes iconic snack foods including Doritos, Fritos, Tostitos and beverages including its namesake, Mountain Dew and Gatorade. It also owns Quaker Foods. The stock is trading 14x 2012 consensus estimates, the low end of its 5-year PE range. Pepsico has $4 billion in cash and generates $4.2 billion in annual levered free cash flow. The company has beaten the Street earnings estimate in three of the past four quarters and 2012 consensus forecasts of $4.91 reflect 9% growth from 2011. The stock currently yields 3%.
The Sizzle: The global market for food and beverage is expected to climb to $15 trillion in 2014 from $11.6 trillion in 2009 with the Asia Pacific market doubling, according to Frost & Sullivan. Pepsico acquired its bottlers last year, a move offering synergies now that integration is well underway. Its core snack foods business, which includes Doritos and Fritos, and beverage business are leveraging expansion into emerging markets for upside. In Q1, organic beverage growth was up 3.5% from the prior year while North American beverage volume rose 2.5%. North American salty snacks sales increased 2.5%. These are mature businesses kicking off solid cash flow. And, the money is being redeployed for brand building to capture global markets. International beverage volume rose 7% while salty snacks roe 5%. In India, snacks volume rose 18% and beverage volume rose 20%. In China, snacks were up 13% while beverages increased 4% and in Russia, snacks rose 26% and beverages were up 13%. The company's non-carbonated sales rose 8%. Pepsi is also responding to higher input costs with targeted price increases, which should help margins as the year progresses. Finally, the company has a lot of opportunity in cross branding to innovate products. A particular focus offering upside is in the nutritional segment, where the company can leverage its Tropicana and Quaker brands.
Varian Medical Systems (NYSE:VAR): Up five of the past five three-month periods ending in August with an average 14.69% return. Varian builds and sells products and equipment used in the treatment of cancer as well as X-ray equipment. Shares are trading 16.67x 2012 estimates. The company has beaten the Street earnings forecast in each of the past four quarters, prompting analysts to increase 2012 estimates to $3.94, which represents 14% growth from 2011. The company has nearly $5 per share in cash and produces $246 million in levered free cash flow.
The Sizzle: The National Cancer Institute estimates 11.9 million people in the U.S. have cancer and 1.5 million more people will be diagnosed annually. Given the average age of diagnosis is 66, a larger and older population suggests more cases will be identified. Globally, 12.7 million new cancer cases occurred in 2008 and 7.6 million people died of the disease. As emerging markets develop, longevity and access to care will further drive spending on cancer treatment. In the most recent quarter, Varian's sales rose 11% to $648 million while its backlog also rose 11% to $2.2 billion. Oncology systems sales rose 9% to $520 million. In North America, oncology system sales were up 12% thanks to growing demand for Varian's next generation Truebeam products and unlocking provider spending thanks to expectations of higher utilization as commercial insurance enrollment begins to improve and legislative mandates kick-in. As accountable care organizations are formed, and providers construct additional patient capacity, equipment sales benefit. The company is also seeing double digit services revenue growth thanks to a higher installed machine base. In Europe, oncology system orders were also up double digits. The company is also selling more x-ray machines. Net orders were up 18% to $124 million in the quarter, resulting in 15% revenue growth to $118 million. Industrial users offer sales upside on rebounding production and an improving economy has brought back dental and veterinary spending. Security market demand for x-ray equipment also boosted sales as Varian's security division generated $38 million of revenue in the quarter, up $25 million from last year, thanks to cargo screening sales.
Summer's fickle nature makes timing as important as ever. Integrating seasonality into your investments can help you spot trends early and keep you focused on stocks most likely to have tailwinds into Q3.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in VAR, DVA, GSK, PEP over the next 72 hours.