10 Best Large Cap Performers Through May

by: Todd Campbell

In my book, "Your Guide to Better Stock Picks" I explain the importance of knowing which stocks perform best at different times of the year. Whether it's tied to the weather or business cycles, investors can use seasonality to narrow their focus and time their entry.

So, which stocks are strongest through May?

Over the past 10 years, only 10 large cap stocks have finished May higher than they begin March every time. And, of eight major sectors, only healthcare and technology fail to have at least one stock in the list.

Oil & Paint are Best in Basic Materials

The two basic materials stocks are Occidental Petroleum (NYSE:OXY) and Sherwin Williams (NYSE:SHW). Occidental has posted an average return of 11.85% and its shares are trading 10.6x 2013 earnings estimates, which is about the mid range price to earnings ratio over the past five years.

The company's fourth quarter earnings were up 28% thanks to ongoing shale production growth and stubbornly high prices for West Texas Crude. Notably, the company produced more oil here in the States last quarter than in any quarter in its history, thanks in large part to activity in the Permian Basin in Texas and Monterrey Shale in California. With crude prices strong in Q1, it's important to remember each dollar change in global prices per barrel translates into $38 million in Occidental earnings before income taxes.

Sherwin Williams has produced an average return of nearly 10% in the three month period and shares are trading about 16x 2013 estimates, which is a little above its midpoint price to earnings ratio over the past five years. Last quarter, revenue grew 9% as consumers started refreshing homes. This pushed Sherwin's comp store sales up 12.7%, which was ahead of the 8.3% full year pace. With apartment vacancy rates falling to 5.2% in Q4 from 6.6% a year earlier and the National Association of Realtors Housing Affordability Index at a forty year record high, paint volume growth offers upside into summer.

Symbol Sector Industry Profitable Years (of 10) Avg. Return Mar-May
OXY Basic Materials Independent Oil & Gas 10 11.85%
SHW Basic Materials Chemicals - Major 10 9.99%

In Conglomerates, only Danaher (NYSE:DHR) achieves the 10 of 10 milestone. Danaher has an average 6.12% gain in the period and shares are trading 14.4x next year earnings estimates, which is slightly tilted toward the light side of its 5 year range. If we extrapolate its current 19 multiple to 2013 estimates, we get a target price of $70. The company's emerging markets sales have increased to 23% of total sales, about in line with its exposure to Western Europe and total revenue ex-acquisitions rose about 4% last quarter year-over-year.

Symbol Sector Industry Profitable Years (of 10) Avg. Return Mar-May
DHR Conglomerates Conglomerates 10 6.12%

Special K dominates in consumer goods.

Kellogg Company (NYSE:K) is the only consumer goods stock to finish the period higher every year. Shares are trading 13.7x 2013 earnings estimates, which is the low end of its 5 year range. The company made a splash in February when it stepped in and bought Pringles from Procter & Gamble (NYSE:PG), who had previously agreed to sell the company to the troubled Diamond Foods (NASDAQ:DMND). Kellogg is in a self-described transition year as it revamps its supply chain to cut costs. Despite posting solid revenue guidance, high commodity costs took their toll last year. An expected ramp in planted acreage may help ease raw input costs in 2013.

Symbol Sector Industry Profitable Years (of 10) Avg. Return Mar-May
K Consumer Goods Processed & Packaged Goods 10 8.05%

House hunting and car shopping help banks and insurers.

In financials, both BB&T (NYSE:BBT) and Progressive (NYSE:PGR) have robust seasonality. BB&T has finished May with an average three month return of 7.13%. Shares are trading just over 10x next year estimated earnings. Loan growth remains the story of 2011 across banking, and in the fourth quarter, BB&T saw its loan portfolio expand by an annualized 7.3% versus the third quarter. A good deal of the growth has come from commercial and industrial loans, which have continued to grow in early 2012. Over at Progressive, shares have produced an average return of 13.6% in the period. The company boosted prices last year, which weighed on customer counts. However, as we move into the summer car buying season the company should see coverage growth as consumers retire aging, gas hungry vehicles for new more efficient models.

Symbol Sector Industry Profitable Years (of 10) Avg. Return Mar-May
BBT Financials Regional Banks 10 7.13%
PGR Financials P & C Insurance 10 13.60%

Airshow airplane orders and improving GDP offer industrials upside.

The three industrial goods stocks with strong seasonality are Precision Castparts (NYSE:PCP), Republic Services (NYSE:RSG) and Waste Management (NYSE:WM). Precision is trading 17x next year estimates, about the middle of its historical range. Rising airplane production and more passenger miles helped its castings and forgings sales climb 14% in Q3 -- the most recently reported quarter. Overall, aerospace, which accounts for roughly 64% of sales, grew 10% organically. The stock is likely to benefit from enthusiasm heading into the Farnborough Airshow in July. The other two industrials are waste managers. Republic, which is trading 13.5x next year estimates, was able to increase prices in Q4 by 1.5%. Waste Management is trading 13.8x next year estimates, which is the low end of its 5 year range. Both stand to benefit from an improving U.S. economy supporting collection volumes.

Symbol Sector Industry Profitable Years (of 10) Avg. Return Mar-May
PCP Industrial Goods Metal Fabrication 10 15.36%
RSG Industrial Goods Waste Management 10 11.42%
WM Industrial Goods Waste Management 10 9.03%

Finally, Yum! Brands (NYSE:YUM) is the only services stock to finish higher all ten years, posting an average gain of 13.64%. The operator of KFC, Pizza Hut and Taco Bell saw its China same store sales grow 19% last year. And, the company is building out in India too, where it opened 101 new stores last year. In the U.S., foot traffic is returning to restaurants alongside the improving economy. In the most recent report, the National Restaurant Association's Restaurant Performance Index remained near a six year high as more operators benefited from sales growth.

Symbol Sector Industry Profitable Years (of 10) Avg. Return Mar-May
YUM Services Restaurants 10 13.64%

The seasonal trend supports legging into these stocks over the next couple weeks, particularly on down days. Given the solid returns and consistent share gains over the past decade, this basket may serve as a great starting point for investors looking at stocks to own for the next couple months.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.