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John Reese is CEO of Validea.com and Validea Capital, and portfolio manager for the National Bank Consensus funds. Globe Investor has a distribution agreement with Validea.ca, a premium Canadian stock screen service.
'The trend is your friend." "Buy the rumour, sell the news." "Dance while the music is playing." Catchy old adages abound on Wall Street. Often these maxims hold at least some truth, though they are usually too vague to use as clear, actionable investment advice.
But one of the oldest of these adages has some impressive data supporting it – though that doesn't mean you should embrace it.
I'm talking about "Sell in May and go away" – the notion that investors should ditch stocks in May and not jump back into the market until autumn. The saying dates back to the 18th century, according to Cliff D'Arcy of Yahoo Finance U.K. Back then, the full saying was "Sell in May and go away; don't come back until St. Leger's Day," which typically falls in mid-September.
Today, the expression's reach has been extended to encompass all of September and October, too. It's not quite clear whether "sell in May" originated as a warning to stay away from markets, a rallying call for wealthy financial types to leave the office and enjoy the summer months, or both. Whatever the case, research shows that it's good advice.
One study, conducted by researchers Sven Bouman and Ben Jacobsen, found that from January, 1970, to August, 1998, the sell-in-May effect was present in 36 out of 37 countries studied, which included both developed and emerging markets. They even found that, in the U.K., "the effect has been noticeable since 1694." Other studies have shown that, even after Mr. Bouman's and Mr. Jacobsen's findings were published, the effect has continued across markets and industries.
No one knows why "sell in May" works – some speculate that the summer vacations of big financial players lead to weakened demand for stocks during the summer months. Mysterious as the cause may be, the effect is statistically significant.
So given that it's mid-May, is it time to cash out your stocks?
I'd be very careful about that. Any time you are implementing a strategy that is designed to take advantage of some inefficiency in the market, you need to do so with the utmost discipline. Even the most successful long-term strategies have bad years – sometimes two or three or even four in a row. Before committing to a sell-in-May strategy, ask yourself how you might respond if the approach has a few down years – or how you'll feel if, come Nov. 1, we're in a bear market and stocks are tumbling. Will you have the discipline to stick to the strategy and buy? If not, you may be headed for trouble. Picking and choosing when you employ good long-term strategies and when you don't usually leads to subpar returns.
In addition, stock pickers should realize that, while sell-in-May has worked for the broader market, individual stocks may behave quite differently. For more than a dozen years, I've been studying the strategies that history's most successful investors have used to pick stocks and I can't recall one instance in which Warren Buffett, Peter Lynch, or any of these gurus passed over a good stock because of the time of the year. If you can buy shares of a good company at an attractive price, I think you should do so, regardless of when during the year it is.
So while it's May, I'm still focusing on companies with strong balance sheets and good fundamentals – companies like these:
Syntel Inc.: This tech firm with a market capitalization of $3.5-billion (U.S.) provides business analytics, cloud computing, IT infrastructure management and other services. Its persistence in increasing profit – earnings per share have increased in all but one year of the past decade – makes it a favourite of my Buffett-inspired model. The strategy also likes that Syntel has no long-term debt and a 10-year average return on equity of nearly 30 per cent.
Alimentation Couche-Tard Inc.: This Quebec-based convenience store/fuel station chain (market cap $31-billion Canadian) has a network of about 13,000 stores across the globe. It gets strong interest from several of my models, including my Lynch-inspired approach, which likes its price-to-earnings (P/E) ratio of 19 and long-term earnings growth rate of 25 per cent. Those two figures make for a strong 0.8 price-to-earnings-to-growth (PEG) ratio, a metric Lynch developed to value growth stocks.
Home BancShares Inc.: Home is the parent of Centennial Bank, a community bank that has locations in Arkansas, Florida and South Alabama. Home (market cap of $3-billion U.S.) has increased earnings per share in each of the past seven years. In its last quarter, it increased EPS by 26 per cent and sales by 28 per cent, one reason it passes my Motley Fool-based strategy, which is inspired by an approach outlined by Fool co-creators Tom and David Gardner. Two more reasons: The company's 33.4 per cent after-tax profit margin and 0.62 PEG ratio.