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'Sell in May' Flops: 3 Value Picks for June - Analyst Blog

The saying 'Sell in May and Go Away' was not applicable this year. In May, benchmarks recorded their best monthly gains since February. The S&P 500 hit new highs on certain occasions, proving investors' reluctance to follow the age-old adage of selling in May.

The summer looks a bright one so far, providing handsome returns to investors who decided not to follow the cliché. The S&P 500 gained 2.1% in May. It also hit a high on the last trading day of the month, the fourteenth time it notched an all-time high this year. The Dow and the Nasdaq gained 0.8% and 3.1%, respectively. The Dow too closed at a record high on May 30.

For investors who may have missed the bandwagon, or who may be apprehensive to enter the markets at such highs, we have 3 value stocks that are most likely to provide handsome returns. However, before we handpick the likely winners for June, let's take a look at what is Sell in May & Go Away, how the benchmarks performed and what happened in May this year.

'Sell in May & Go Away'

The saying 'Sell in May and Go Away' reportedly dates back to 1930s. Traders back then would say, "sell in May and go away, stay away till St. Leger Day."

Investopedia notes: "This strategy is based on the historical underperformance of stocks in the six-month period commencing in May and ending in October, compared to the six-month period from November to April. According to the Stock Trader's Almanac, since 1950, the Dow Jones Industrial Average has had an average return of only 0.3% during the May-October period, compared with an average gain of 7.5% during the November-April period."

A general assumption behind this well-known trading adage is that excited investors seeking to get a jumpstart at the start of the year propels the stocks to overbought territory. During the summer, investors take a breather, thereby reversing the stocks to oversold territory by the fall.

S&P 500's Historical Performances in May

The 2014 Stock Trader's Almanac reported that S&P 500 has lost 83 points from May to October between 1950 and 2012. This is in contrast to 1,663 points gain between November and April. It also reported that while Dow has added 16,398 points during November to April, it has lost 1,772 points from May to October.

Separately, Standard & Poor's Capital IQ Chief Equity Strategist Sam Stovall notes that since the second World War, the S&P 500 has added an average 7% from November through April. On the other hand, S&P 500 has added 1.3% from May to October. He also mentioned that the S&P 500 has lost 1.6% on average in the May to October period during midterm election years.

Benchmarks' Performance Since 2009

However, a prudent move should be to check how true the adage has been in the last five years. That should give the latest indication.

Benchmarks 2009 Performance (%) 2010 Performance (%) 2011 Performance (%)
Yearly May-Oct Nov -Apr May Yearly May-Oct Nov -Apr May Yearly May-Oct Nov -Apr May
S&P 500 19.67 18.08 13.79 7.45 11.00 -1.49 15.13 -10.94 -1.12 -7.93 14.74 -1.18
Dow 16.48 18.27 12.45 3.51 9.39 -0.30 15.15 -9.10 4.69 -6.66 13.34 -1.85
Nasdaq 39.38 24.74 20.10 3.21 12.85 0.35 14.72 -9.67 -3.21 -6.27 16.85 -1.0

Benchmarks 2012 Performance (%) 2013 Performance (%)
Yearly May-Oct Nov -Apr May Yearly May-Oct Nov -Apr May
S&P 500 11.68 0.45 11.91 -6.79 26.39 10.98 6.94 3.04
Dow 5.70 -1.38 12.15 -6.67 23.59 5.75 6.18 2.82
Nasdaq 14.00 -2.40 10.22 -7.31 34.2 18.81 4.91 4.75

The chart shows, except for 2009 and 2013, the Nov-Apr period has outperformed the May-Oct performance. In 2 cases, the S&P 500 has been in the red in May-Oct period and it avoided a finish in the red in 2012 with meager gains of 0.45%.

Positives Outweigh Negatives in May

Benchmarks finished mostly lower for the first two weeks, dragged down by intense selling pressure in Internet and small-cap stocks. Also, selloffs in utilities and energy sectors had a negative impact on the benchmarks.

From May 1 to May 16, the S&P 500 had lost 0.3%. However, things reversed in the second half as S&P 500 scored gains of 2.04% from May 19 to May 30.

Among the positives, gains in small-cap and high-growth stocks drove benchmarks higher for the month. Additionally, gains in consumer discretionary and energy stocks helped benchmarks finish in the green. The Nasdaq was boosted primarily by gains in biotech stocks.

Separately, Federal Open Market Committee's (FOMC) indication that central bank will remain flexible when it comes to raising short term interest rates was a positive. Fed Chairwoman Janet Yellen's indication to keep the key lending rates low, Russian President Vladimir Putin's willingness to discuss measures to ease the Ukrainian crisis and dovish comments from ECB President Mario Draghi were also cheered.

Additionally, an upward revision of March's retail sales data, encouraging small-business sentiment, upbeat services sector data, increase in ISM Services Index and better-than-expected initial claims numbers helped the benchmarks move north.

Outlook for June

Most reports released last month indicate that growth will soon pick up, reversing this month's decline. According to some estimates GDP growth in the second quarter could be at 4% or even higher. However, consensus estimates indicate growth of at least 3% or more. The pace of growth is expected to accelerate over the second half of the year and this trend is expected to continue. Benchmarks' progress into record territory reflects this inherent optimism of the U.S. economic outlook.

3 Value Picks for June

The opportunity is not lost yet for investors to benefit from the bullish trend. Investors were in no mood to sell in May and there are some promising stocks that investors can buy in June. These stocks are great value picks, as despite decent year-to-date return and Zacks Rank #1 (Strong Buy), their Price/Book is below 3 and has Price/Earnings ratio lower than 15. They also have current return on equity above 15%.

Delta Air Lines Inc. ( DAL ) is the second largest U.S. airline and provides scheduled air transportation for passengers and cargo throughout the U.S., and around the world. Delta has also established a large Latin American presence in this decade. For 2014, Delta is committed to improve operational performance, improve margins and make balanced capital deployment to increase shareholder returns. The company lowered its net debt to $9.1 billion at the end of first quarter 2014, and is planning to lower it further to $7 billion in the next two years.

Price/Book = 2.91

Price/Earnings = 13.46

Return on Equity = 52.08%

Year-to-Date Return = 45.3%

Banco Bradesco S.A. ( BBD ) is a Brazil-based bank offering a wide range of financial products and services targeted at individuals as well as corporate customers. Its range of operations includes investment and international banking. The bank operates within the country as well as in foreign nations and has several subsidiary companies. The company reported earnings surprise of 8.82% in the latest reported quarter and has current year growth estimate of 20.7%.

Price/Book = 1.87

Price/Earnings = 9.55

Return on Equity = 17.71%

Year-to-Date Return = 11.3%

CVR Refining, LP ( CVRR ) is engaged in the refining of petroleum primarily in the United States. It has refining and related logistics assets that operate in the mid-continent region. It is a subsidiary of CVR Energy, Inc. ( CVI ). This security in the petroleum refining space is seeing solid earnings estimate revision activity as well. Over the past month, current quarter estimates have risen from $1.00 per share to $1.17 per share, while current year estimates have risen from $3.40 per share to $4.49 per share.

Price/Book = 2.30

Price/Earnings = 5.96

Return on Equity = 35.01%

Year-to-Date Return = 18.4%

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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