There’s Truth in This Market Maxim

Matthew Carr
by Matthew Carr, Emerging Trends Strategist, The Oxford Club
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Investors love to parrot adages and strategies.

At a party last weekend, the conversation turned to the markets and investing. And at one point, I simply sat back and chuckled as I listened to a barrage of sound bites...

"You know when the best time to plant a tree is? Yesterday. You want to know the second best? Today."

"Think risk first, then reward."

"Buy companies, not stocks!"

"Don't fight the tape."

On and on it went.

Being that it was Greek Easter, I blame the fortune cookie conversation on too much roasted lamb and Metaxa, a blend of brandy and wine.

Now, many Wall Street sayings remain relevant after decades and even centuries because there are kernels of truth in them.

To support my argument, I'll borrow a maxim from financial media pioneer Dick Davis: "We should treat market truisms with respect, but not as gospel."

Because understanding a Wall Street truism can make us better - more profitable - investors.

Sell in May? Kind of...

As a trend trader, I'm well-versed in market timing axioms.

For instance, there are few market sayings that irk me more than "Sell in May and go away. Don't come back until St. Leger's Day." (Or for Americans, "Don't come back until Labor Day.")

I'm not irked by the saying because it's necessarily wrong...

On Monday, I showed that April is one of the best months for stocks before we skid into the "summer lull." (Though by no means do I think investors should sit on the sidelines because of that.)

I'm irked because hailing "Sell in May" as gospel is dangerous. And you're probably going to do more harm than good to your portfolio by following it.

The reality is that this saying applies to a specific sector: retail.

Retailers rake in most of their money during back-to-school season and the holiday crush.

Those events are in the back half of the year.

And we see this consumer spending trend play out in share prices.

Retail stocks typically start gaining momentum in October - they drive higher on third quarter earnings announcements. That optimism continues through fourth quarter reporting in February.

But it all starts crumbling when first quarter earnings are publicized in April and May.

I'll use a revenue chart from Macy's (NYSE: M) so you can clearly see why...

The big spike each year represents fourth quarter revenue. After all, there are plenty of reasons for consumers to shop during the winter months.

Investors get excited as revenue surges from $5 billion to around $9 billion...

But they're equally deflated to see it crash back down again, even though it happens every year.

Since October, shares of Macy's are up more than 34%.

They soared on third quarter earnings... just as they've done in four of the past five years. And they spiked higher on fourth quarter earnings, as Macy's shares have consistently done for a decade.

But that's likely it for now.

This is where "Sell in May" comes into play.

According to my own Prime System research, Macy's shares have fallen on first quarter earnings six times since 2010. And the average one-day drop on the report is more than 4%.

With no big spending events between Easter and back-to-school season, May is the start of a sluggish period for a wide range of retailer shares, not just Macy's.

Sell Most Retailers Now

My proprietary Prime System Retail (PSR) Index performance from May to October is a good illustration of this "blah" period for retail...

The PSR Index is made up of more than two dozen retail companies, including Macy's. And this trend shows why we don't buy a lot of retail shares between now and October.

It's because they tend to fall. So we're just throwing our hard-earned money down the drain.

Since 2000, the PSR Index has gained just five times during the May to October period. And as you can see, the biggest gains followed broad market collapses - they were rebound periods.

Does all this mean there are no retail companies for the summer months? No.

We're just more selective about what type of retail we buy.

And this illustrates the core of my investing philosophy: playing the strength of a rotating sector strategy.

This is where investors target specific companies during their best months of the year, exit at the peak and roll everything over to the industries that are about to hit their most bullish months of the year.

If you're an investor buying retailers now because they've been on a great run the past six months, you may be in store for disappointment.

The trend is against you.

As I often say, there's always a bull market somewhere. You merely have to know where to look. And you have to know what market maxims to treat as gospel.

Good investing,

Matthew

Thoughts on this article? Leave a comment below.

Reviving an American Brand

Since we're playing the idiom game, here's another one for you: "Shop 'til you drop."

Usually referring to a day at the mall with the girls, it could also apply to Matthew's retail stock buying strategy - scoop up high performers on strong earnings reports beginning in October... and drop 'em by May (generally).

Matthew suggests having a July exit strategy for his Prime System Trader recommendation Gildan Activewear (NYSE: GIL), so there's still time to get in on the action...

We've started to see some marked improvements in the retail sector recently. Companies like Abercrombie & Fitch have raised full-year guidance and are expecting same-store sales to increase.

News like that continues to demonstrate my belief that the worst of the retail apocalypse is over. Companies have adapted, cut costs, refocused on e-commerce and are transitioning back to growth.

And that brings us to our next Prime System play... Gildan Activewear (NYSE: GIL).

For those unfamiliar with Gildan, it's a Canadian apparel company whose brands include its namesake brand plus Anvil, Gold Toe and Silks, among others. It also has licensing agreements with Under Armour, Mossy Oak and New Balance.

In November 2016, Gildan announced it would be acquiring American Apparel. This is an intriguing piece of the pie.

When American Apparel filed for Chapter 11, Gildan swooped in and purchased the company for a mere $66 million. It did not purchase any brick-and-mortar assets, and all retail locations were closed. American Apparel was reborn as a completely digital label.

Over the past five years, shares of Gildan have been weak in August, September, October and December. They have a kind of dead-cat bounce in November as anticipation builds for third quarter earnings, but then they fall from there.

On the flip side, January through July offers a solid stretch of gains.

Over the last 10 years, holding shares of Gildan from now until mid-July has resulted in an average gain of 39.3%, with a 90% success rate. During the past five years, the average gain of this Prime Period on Gildan shares has been 25.7%, with a 100% success rate.

During their Non-Prime Period (July through January), shares of Gildan have fallen an average of 15.4% over the past decade. And they have fallen an average of 9.6% over the past five years.

On February 22, Gildan reported fourth quarter earnings.

Net sales increased a little more than 11% to $653.7 million. This was led by a 27.6% increase in its Printwear segment to $415.6 million, helped by the acquisition of American Apparel.

The company also announced a 20% increase in its quarterly dividend to $0.112 per share.

Revenue and EPS for the quarter topped expectations.

But EPS came in at $0.31, which was a year-over-year decline. And that was because the company saw a $0.04 hit from the tax recovery in the fourth quarter. So we saw a rare slip in shares on its fourth quarter report.

But looking ahead, expectations are for Gildan to report $680 million in revenue with EPS of $0.42 for the first quarter. And for the full year, Gildan is forecasting EPS between $1.80 and $1.90. It expects net sales to increase in the low- to mid-single digits.

It's been a little bit of a slow start for our Gildan shares. But I think we'll start to see a turnaround! But be timely... and aware. I expect to recommend exiting sometime in July.

- Donna DiVenuto-Ball with Matthew Carr

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