Most people have something that to them indicates when summer has arrived. For those of us with kids of a certain age, it is the blessed relief of peaceful mornings when we no longer have to wake, feed, and motivate sleepy teenagers. For others, it is the presence of wildlife or the blooming of flowers in their yard, or the first trip to the beach or pool.
For traders, it is an extended period of trading essentially sideways, which is what we have seen over the last month or so. As of yesterday’s close, the S&P 500 is up eight points, or less than 0.4%, for the month of June and has spent the entire month in a range of around 1.6%. For investors with cash to deploy that means that picking individual stocks that can outperform over the next couple of months can pay big dividends.
The first pick to outperform in the summer months is a company that seems to have rediscovered its innovative, techy nature recently, but whose stock has so far not factored in the return to growth that has resulted from that. For the last decade or so, Microsoft (MSFT) has been perceived by many as a mature, somewhat boring company.
That was a justifiable view early in that period, but, as I suggested it might at the time, Satya Nadella’s appointment as CEO in 2014 changed that.
Microsoft’s focus on cloud services for businesses and the success of the Surface have led to a resurgence in growth. Year on year revenue growth of close to 28% and improved margins are hard to achieve when that revenue is well over $85 billion, and maybe that is why the market has not yet come to terms with the company’s success.
MSFT was at around $37 when I wrote the above referenced article and is now over $70, but is still trading at a fairly average forward P/E of 21. The stock looks destined to move up, almost regardless of what the rest of the market does through the summer.
My second summer pick is riskier in that the IPO was less than a year ago and has been followed by high volatility, but the flip side of that is that the stock has more upside. Medpace (MEDP) is an Ohio-based company that provides drug development and trial services to the pharma and biotech industries. Given the pace of development of new therapies, this is a rapidly growing field, and that is reflected in Medpace’s numbers with year on year quarterly earnings growth of 145%.
The last two quarters’ earnings reports have disappointed the market but in many ways, that is a product of exaggerated expectations rather than poor performance. Now, at very close to the price immediately following the IPO and with expectations more realistic, Medpace has a good chance of bouncing right back towards the $38.94 high.
These two stocks are very different in many ways. MSFT is about as established a tech stock as there is while Medpace is a young company, but they have a couple of things in common. Both are growing rapidly, and in both cases, if for very different reasons, the market is not really pricing that growth into the stock. That is usually a situation that corrects itself over time, so in both cases there is a good chance that even as the market continues its summer lethargy the stock offers decent returns over the next two to three months.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.