Sell In May And Go Away? A 2012 Primer (BAC, JPM, GE, AA, CAT, MSFT, INTC, AAPL, XOM, CVX, DD)

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It is that time of year again.  It is time to ponder the theory of pricing in a summer slowdown, whether it actually happens or not.  In short, is time to “Sell in May and go away?”  2012 could be different.  After all, this is an election year and it is not as though the U.S. is in the same spot it was in during the 2008 election.  2012 also faces the challenges of the larger European nations, as well as very sluggish reports from the growth markets of China, India, and South America.

Many investors might actually hope that we do get a 10% correction so that they can get into stocks again.  Recent reports have shown that the average investor has still shied away from stocks in favor of the safety of bonds.  The DJIA peaked above 13,300 in March after having ended 2011 at 12,217.56.  It is hard to imagine this, but the DJIA had a low of under 6,500 in early 2009 at the peak of the panic selling.  That was back to 10,000 by October of 2009 and the market is above 13,000 at the current time.  Is it possible that the DJIA has really doubled from the lows and Joe Public has not participated at all?

We want to take a look at the valuations, dividend yields, performance, and underlying trends driving some of the key industry leaders which have already reported earnings and offered guidance in order to get a better handle on what to expect for the coming summer.

Chrysler is also acting as a strong barometer for U.S. auto sales, even if the highly-volatile durable goods orders have been weak for two months.  While the retail segment is marred by a couple of undercurrents right now, sales have remained positive in 2012 when some were expecting some negative overall numbers. Now we also have a fresh report calling for at least 8% dividend growth from DJIA stocks this year and the components have so far been hiking dividends above what was expected.

We have taken a look at the following: Bank of America Corporation (NYSE: BAC) and J.P. Morgan Chase & Co. (NYSE: JPM) in banking; General Electric Co. (NYSE: GE) as the conglomerate leader (and economic barometer); Alcoa Inc. (NYSE: AA) as a leading indicator of the metals markets; Caterpillar Inc. (NYSE: CAT) as the construction and super-heavy equipment leader; Microsoft Corporation (NASDAQ: MSFT) and Intel Corporation (NASDAQ: INTC) as the tech leaders; Apple Inc. (NASDAQ: AAPL) not as a DJIA component but as an asset class; and Exxon Mobil Corporation (NYSE: XOM) and Chevron Corporation (NYSE: CVX) as the American leaders in Big Oil. We also want to consider E. I. du Pont de Nemours and Company (NYSE: DD), or DuPont,

A Recent History of “Sell In May and Go Away”

2009 was a very different year because the market was recovering from the crash and stocks were still benefitting from that move.  2010 was a nasty start of summer as investors worried about a double-dip recession as housing prices continued to sink and unemployment was still a prime concern.  We also faced that punishing event called ‘The Flash Crash.’ Another big distraction was BP PLC (NYSE: BP) for its disaster in the Gulf and America and the rest of the world was starting to consider some problems in nations called the PIIGS.  The market peaked around 11,300 in late April and had sunk to a 9,800 by early May.  Even around July 6 the DJIA was only around 10,200 and was only back up to almost 10,500 after the end of August around Labor Day.

2011 felt close to a repeat of 2010 with the worries not just about the PIIGS but about the possibilities of a U.S. debt rating downgrade which did ultimately come.  Housing was still in the tank and employment was not yet in a full-blown recovery in America. While the end of April to the end of May did see a drop of 800 points in the DJIA from almost 12,900 in late April and early May to just above 12,000 by late May and 11,900 by late June, it was late-July and August which were the cruel months for the DJIA as companies began to suffer serious earnings concerns. The DJIA bottomed out just under 10,600 in August.  By late-October the market was back above 12,000 again.

So, here we sit at the end of April in 2012 with a long road of political hate ahead of us, and an economy that is still sluggish but one which not go into recession.  Right now the labor data is still choppy even though unemployment is down to 8.2% due to lower labor force participation rates.  Earnings growth has slowed down and Europe remains a key concern with the stable European nations being a concern on top of the PIIGS.  The good news is that equity values remain attractive and the FOMC is still pledged to a policy of maintaining an “exceptionally low rate policy” through the end of 2014.

The Leading Companies As Economic Barometers

Bank of America Corporation (NYSE: BAC) and J.P. Morgan Chase & Co. (NYSE: JPM) are the two DJIA money-center banking leaders and they are both at discounts to their respective book values.  Both banks turned in earnings reports that show some stabilization even if mortgage woes remain a hangover from yesteryear.  2012 has also been a period of incredible recovery from an awful 2011.  Bank of America effectively doubled from trough to peak from late 2011 to the end of the first quarter and at $8.26 it has a consensus analyst target of effectively $10 that implies upside of close to 21%.  J.P. Morgan is around $43 it has risen 35% from trough to peak from late 2011 to the present time.  Its dividend yield is back up to almost 3% and the price target of about $52.80 implies upside of almost 23%.