Sell In May and Go Away
Edgar is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I’m sure every active investor is familiar with the phrase in the headline, since May historically has been one of the worst performing months for equities. The volatility is already bringing down large cap actively traded names like Apple (NASDAQ: AAPL), Las Vegas Sands (NYSE: LVS), Priceline (NASDAQ: PCLN), and even Bank of America (NYSE: BAC), which beat the Street’s expectations. But if you are a shrewd investor, then you take Buffett’s advice on viewing volatility as a friend, not an enemy. After all May could be an excellent time to start building positions on discounted value names.
So when Goldman Sachs raises Apple’s price target to $750, and the next day stock plummets below $600, I would start pondering several questions: Is the market being efficient? Is the stock being oversold due to iPhone sale fears? Qualcomm supply disruptions? What is the probability of the stock finding support below $550 and should I start averaging down now? I am a long term bull on Apple, but to this day I refrain from hedging with short positions during turbulent times, specifically with put options. I find shorting Apple incredibly risky and tricky at the same time. Consider what happened on April 17, which was a complete bloodbath for bears as the 5% unexpected surge squeezed shorts out of their porridge. Even buying in-the-money puts can leave you at a loss fairly quick when the bulls begin to charge. Shorting the largest tech giant with a strong balance sheet and more cash than U.S. Treasury is a move one should pre-plan with swift exit strategies in place.
Las Vegas Sands is another favorite of mine as I see dip buyers line up every time there is a strong sell-off in the stock. Its option volume on the call side has increased significantly, signaling a fresh optimism from the investors. The hotel and casino giant’s credit rating was recently upgraded from BB to BB+ by S&P. That, along with CEO Sheldon Adelson’s aggressive move into securing a new multibillion dollar casino strip project in Spain, really puts the company under a spotlight. Opening a casino in Barcelona or Madrid when the country is suffering from a 20% unemployment can really mean pricing power for the shareholders. I expect LVS to begin trading above $60 in June, if not May.
Priceline has taken its time to cool off before chugging toward $800 a share. I have high hopes for PCLN as its free cash flow growth of over 10% keeps investors dedicated. The stock remained resilient above $700 despite index averages showing recent weakness. As a global leader for online services, the company is still able to grow revenues by 30% a year despite generating most of those profits from debt ridden European countries. I am cautious on Priceline.com given their steady bullish run-up in the last six months, but with institutional holdings growing to 102%, and constant share accumulation by retail investors, I'm in a neutral stance.
Bank of America surprised investors yesterday as it was sold off despite bringing in $653 million in the first quarter. Its pre-tax operating profits increased to $3 billion vs. -$0.7 billion in Q4 of 2011. Additionally, with its $4.8 billion pretax negative valuation adjustment, it is hard to decipher the company’s financial viability and its true improvement. I remain long on Bank of America, but concur with Paul Miller’s “Hold” rating of FBR Capital Markets mainly due to its large exposure to PIIGS, which currently remains near $10 billion.
I wholeheartedly find that the best market inefficiencies are created by large abnormal swings, which are the result of panic, fear, and future uncertainty. While DOW is still struggling to remain above 13,000 and NASDAQ above 3,000, the next month can definitely prove to be a season for bargain hunters.
Motley Fool newsletter services recommend Apple, and Priceline.com. The Motley Fool owns shares of Apple, Bank of America, and Qualcomm. edgarambart30 is long Bank of America and Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.