May Is a Good Time to Toss Out Stocks You Doubt: John Dorfman
A venerable stock-market saying advises investors to “sell in May and go away.”
Unlike some adages, this one has considerable empirical evidence in its favor. Ned Davis Research Inc. says the average six-month price gain for stocks in the Standard & Poor’s 500 Index since 1952 has been 6.36 percent for the November-through April span compared with only 1.58 percent for the May-through- October period.
Personally, I would never completely “go away” from the stock market. I believe investors should have some equity exposure all the time.
However, with seasonal tendencies in mind, May is a great time to weed out a portfolio each year. I think infrequent traders should try to discard about 10 percent of their holdings each year. Buy-and-hold is a good strategy, but only up to a point.
During May through October, I think investors should require compelling arguments before adding a stock to the portfolio, but should listen attentively to “sell” ideas. During November through April, I think “buy” signals should get the benefit of the doubt.
Here are some stocks to consider selling if they are among your holdings.
In the 1980s and early 1990s Boeing Co. was my favorite stock and largest personal holding. Today it no longer resembles the company I once admired.
The Chicago-based company’s balance sheet has become bloated with debt. Total debt has climbed to more than 400 percent of stockholders’ equity.
Competition Intensifies
The competitive landscape is rougher than ever for Boeing’s commercial aircraft business. The company vanquished its former U.S. competitor, McDonnell Douglas Corp., but its European rival Airbus SAS is a formidable competitor -- aided, Boeing claims, by a tailwind of unfair subsidies from European governments.
Then consider the company’s valuations. When I first bought Boeing stock about 30 years ago, it sold for about six times earnings. Today its shares trade at 39 times earnings and 18 times book value. Ugh.
Another candidate for the chopping block is Caterpillar Inc. of Peoria, Illinois, the world’s largest maker of construction equipment.
It may seem strange to sell a company whose products should be in demand as the economy recovers. There are good reasons to unload this stock, however.
Dollar Mechanics
For one thing, about two-thirds of the company’s revenue comes outside the U.S. When the dollar is weak, profits earned abroad translate into a larger number of dollars. When the dollar is strong, those foreign sales ring up as a lesser total.
The dollar has been strengthening against the euro during the past few months, a trend that hurts Caterpillar.
Cat’s balance sheet, like Boeing’s, looks strained. Debt is 337 percent of equity.
Had you been bought Caterpillar shares at the nadir of the bear market in March 2009, you could have paid a bit less than $24 a share. Today, at about $68, shares trade at 33 times recent earnings and about five times book value, no bargain in my judgment.
Another well-known stock I dislike currently is Dow Chemical Co., located in Midland, Michigan. The company earned 62 cents per share in 2008 and 32 cents in 2009, when the recession raged. This year, analysts expect a bounce-back to $1.65, and they forecast $2.54 in 2011.
Already Baked
Maybe that will come true. Dow reported a nice first quarter, with earnings of 41 cents a share, topping analysts’ expectations. Even so, it seems to me that a lot of good news is already baked into the stock price.
Dow shares go for 34 times trailing earnings and about 18 times estimated earnings. Those seem to be high multiples to pay for a mature cyclical stock whose raw-material costs -- mainly for oil -- are likely to rise.
Finally, I would consider selling Starwood Hotels & Resorts Worldwide Inc., based in White Plains, New York. The company’s stock has moved up about 88 percent in the past six months.
Clearly, the hotel business is improving. Starwood swung to a profit in the first quarter from a loss in the previous one. Yet at 54 times earnings and close to six times book value, Starwood’s stock price, I believe, is zipping ahead of the company’s fundamentals.
Also, Starwood has been trying to move more upscale with luxury brands such as Westin, W and St. Regis. I think business and vacation travelers will stay price-conscious for a long time.
With any of these stocks, pay attention to the tax repercussions of a sale. If you have substantial capital gains, you should normally wait until you have held the shares for 12 months, so that your profit will be taxed favorably as a long- term capital gain and not as ordinary income.
Disclosure note: I have no long or short positions in the stocks discussed in this week’s column, personally or for clients.
(John Dorfman, chairman of Thunderstorm Capital in Boston, is a columnist for Bloomberg News. The opinions expressed are his own. His firm or clients may own or trade securities discussed in this column.)
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To contact the writer of this column: John Dorfman at jdorfman@thunderstormcapital.com
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