Careful advice on selling – or buying – in May
On balance, this is still a good time of the year to be wary of stocks, says this Canadian analyst, but that doesn’t mean go away entirely.
It’s not as though anyone can tell you exactly what’s going to happen on the stock market the rest of this week, or next week, or next month.
So we come back to the time worn phrase "sell in May and go away." (We wonder if investors in ancient Rome chiseled the same phrase on their tablets as they waited to speculate on the grain harvest?)
Today we apply the idea to three Canadian commodity stocks, two of them very well known, the other a less prominent name.
Our guide through the May selling season is Ms. Jennifer Dowty, an assistant VP and portfolio manager at MFC Global Management. Writing in The MoneyLetter, she gives us a scorecard on the first-quarter earnings season as it draws to a close.
Toting up the results, she sees a reasonable sprinkling of good news, but not enough to seriously change the traditional seasonal wisdom.
Looking good?
Even though more companies than usual failed to meet the street’s expectations — and they were not great expectations — investors generally seemed to shrug off the negative news, says Ms. Dowty.
In effect, the unimpressive earnings were yesterday’s news and investors were looking forward to better results in the future.
Company management teams fell in line, issuing optimistic statements that earnings would improve in the second half of the year.
The economy was looking less like a disaster area. Consumer confidence seemed to be on the upswing, the U.S. housing market appeared to be stabilizing and manufacturing data looked better.
The negative side
On the other hand, the negative side of the ledger is far from empty — rising unemployment in the U.S., declining global economic forecasts and no real improvement in retail sales.
Both the Bank of Canada and the International Monetary Fund lowered their economic targets. If an economic recovery does not show up by the end of the second quarter, says Ms. Dowty, analysts will be revising their earnings forecasts down for 2009 and 2010.
And that would set off a stock market decline in the historically weak months of August and September. The market seems to want to go higher in the immediate future. But it feels like a speculative rally to this analyst.
If further economic data does not bring fundamental support to the market, she says, "I believe it is prudent to ‘sell in May and go away’."
But not everything needs to be in cash. There are some stocks that could be in season this summer.
A core holding
Historically, three sectors perk up in July, August and September — integrated oil and gas, fertilizers and agricultural chemicals, and gold. Ms. Dowty picks one stock in each of these fields.
She begins in oil and gas with a "core holding that investors should own," Suncor Energy (TSX-SU).
The merger with Petro-Canada announced in March is certainly the biggest news on this stock. The company has a large resource base and strong cash flows, says the analyst, and it trades at reasonable valuations. If the deal goes through (as expected), it will be one of Canada’s largest energy firms.
When Ms. Dowty wrote her article the stock’s 50-day moving average was rising, suggesting the stock might re-accelerate, going as high as $37.
In fact, that is just what has happened, as the stock has breached the $37 level. She also surmised that if the price of crude fell, the stock could retreat below $30. Thus far, crude has stayed up, of course.
Ms. Dowty’s thinks it’s a good idea to accumulate shares below $30. But at any price, this is a stock that Canadian investors should own.
Two big contracts
As usual, Potash Corp. of Saskatchewan (TSX-POT) is up and down. It is of course the world leader in its industry, and July and August are historically its strongest months.
About a month ago, Potash joined the chorus of companies reporting disappointing earnings. And management lowered its earnings expectations for the year. Sales volumes were down, chiefly because farmers were holding off on their fertilizer purchases, waiting for better prices.
Yet the stock price held up. Investors are clearing looking to the future, especially two big contracts in China and India that should be signed in the next few months.
Ms. Dowty’s prediction that the stock price might rally to $120 was quickly realized. That is about where it sits right now.
The analyst recommends accumulating shares on those days when this volatile stock dives under $100.
Carry on exploring
You may not be as familiar with Red Back Mining (TSX-RBI), but this gold producer has two mines in West Africa.
There are ten years of expected life in both mines, but exploration is under way to see how far that life may be extended.
The company has more than enough money to carry on exploring with $150 million in cash and no debt. "Red Back’s production growth profile is very attractive," says Ms. Dowty. Production is due to almost double from last year’s 260,000 ounces to 500,000 in 2010.
Events have rushed ahead in the short time since Ms. Dowty penned her report. The stock had been trading between $7 and $8.75 when she wrote. This Monday, Red Back reported record net income for the first quarter and the shares now sit at $10.75.
Whether or not the stock slides back from that level, the analyst’s recommendation was to buy under $8. And as she told her readers in The MoneyLetter: "Historically gold outperforms during the months of August and September."
Whichever way the share price goes in the weeks ahead, the company appears to be headed in the right direction.
So the message is not cut and dried. You don’t have to go away entirely in May. You can buy, but do it very, very carefully.
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