INSW - Sell In May And Go Away? 3 Stocks To Buy On Weakness

2023-04-30 07:00:00 ET

Summary

• Whether or not you subscribe to Wall Street’s adage “sell in May and go away,” it’s nearly impossible to time the market, but you can identify stocks with strong fundamentals.
• Debunking a longer-term trend, nine out of the last ten years have delivered positive returns between May 1st through October 31st.
• If the market retreats, I recommend buying the dip on the three stock picks in this article.
• Macroeconomic challenges have limited profits, and we may continue to see weakness and decreased margins for some companies through July, leading to greater earnings uncertainty.
• My three stock picks are in sectors that have historically performed well during summer, and possess solid metrics that can be viewed as an opportunity to buy on overall market weakness.

Buy Weakness During 'Sell in May And Go Away'

Buying the dip refers to purchasing stocks when their prices have recently dropped, a strategy that can potentially lead to higher returns in the long run because you are buying stocks at a lower price than what they were previously trading; taking advantage of market weakness or with Dollar Cost Averaging (DCA). DCA is a popular investment strategy that involves investing a fixed amount of money at regular intervals over a period of time, which may potentially offset the risk associated with trying to time the market. I am highlighting three stocks where weakness could lead to an opportunity. Where the three stock picks are ‘Strong Buys’ based on quant ratings, not all anticipate a reversal in security price, given the economic outlook. The economic outlook signals some slowing, and while some stocks may not look as appealing now, consider a long position, which could pay off throughout the summer.

Although some investors believe the Wall Street saying “ sell in May and go away ” means forget about the markets during the long summer by taking a break from trading (vacationing in Martha’s Vineyard) until the fall. Others analyzing stocks and the major indexes' performance can prove to be an opportunity to exploit trading patterns. Whatever your position, May is deemed a period to sell and stay away from the market until October. Yet, nine out of the last ten years have delivered positive returns for stocks during the six-month period between May 1st through October 31st, so you may want to take advantage of buying on a ‘sell in May and go away’ market dip or a more severe pull back on earnings and economic concerns.

9 out of the last 10 years delivered positive returns (Based on Geometric returns)

While some months and years were historically weaker than others, as Bank of America strategist Stephen Suttmeier said ,

"Seasonality back to 1928 shows that May through October has the lowest average and median returns of any six-month period of the year, with the S&P 500 up 65% of the time on an average return of 2.16% (3.11% median)...[Although] May can be a weak month for the S&P 500, if you 'sell in May and go away, 'you could miss a Summer rally."

Despite easier comps on the back of the Ukraine War and Covid Payback, with the Corporate Earnings Season underway and off to a better start than the last two quarters, companies with strong earnings growth and bullish momentum may have the propulsion to get them through the summer. Where analysts are revising estimates, searching for the right stocks to combat high-interest rates and inflation is vital because the macro environment is uncertain. With risk-off investing having experienced an uptick amid talks of a ‘mild recession,’ many industries and stocks are susceptible to declines in an uncertain market. Avoid the stock losers with poor fundamentals and outlooks, regardless of the season, by focusing on Strong Buy Recommendations that have outperformed the S&P 500 Total Return Index.

SA’s Strong Buy Stocks’ Quant Performance

Rather than retreating, consider purchasing stocks with strong fundamentals and positive analysts' convictions during periods of weakness. With the approaching summer ‘tis the season for travel, dining out, and related spending, providing a buying opportunity for those investors who do not want to sell in May or are eager to take advantage of any market weakness.

An ingredient for summer travel involves oil and gas. As I wrote in a recent article titled Top Stock: The Buy Amid The TORM , “Oil futures are already on an uptick, reflecting contracts tied to deliveries as far out 2025. Fuel consumption is expected to increase through 2024, according to the U.S. Energy Information Administration .” Despite the energy sector’s volatile price swings, stocks in oil and gas have fared well, which is why, along with one discretionary stock pick, I’ve included a Strong Buy energy stock for a potential rally ready 2023 summer.

Capture The Upside: Stocks to Buy

Instead of selling in May, investors may gain by focusing on stocks with strong fundamentals and ‘Strong Buy’ ratings. Although consumer spending experienced a 3.7% increase, the U.S. economic growth slowed to 1.1% for the first quarter amid banking concerns, rising inflation, and interest rates, year-to-date, the major indexes have gained.

Low unemployment and wage gains have contributed to consumers weathering this high-cost environment. And while there’s no guarantee of a May or summer rally, considering “seasonal” trends may prove to be an opportunity for investors wanting to capitalize this summer, which is why I have three Strong Buy-rated stocks primed to heat up your portfolio for the summer.

1. Darden Restaurants, Inc. ( DRI )

• Market Capitalization: $17.96B

• Quant Rating: Strong Buy

• Quant Sector Ranking (as of 4/27): 21 out of 539

• Quant Industry Ranking (as of 4/27): 3 out of 46

Surprisingly resilient, the restaurant industry has forged ahead. Through its subsidiaries, Darden Restaurants, Inc. owns and operates popular chains like Olive Garde, Capital Grille, and Eddie V’s. Consecutively beating earnings, Darden is capitalizing on increases in consumer spending patterns, despite a challenging macroeconomic environment and softer-than-anticipated second half of the year.

Darden Stock Factor Grades

Although Darden’s valuation is stretched, as showcased by its forward P/E ratio, that’s a 32.03% difference to the sector and forward PEG of 1.48x versus the sector median of 1.21x. Despite this premium, Darden’s momentum and growth have remained solid, as highlighted by SA’s Factor Grades, which rate investment characteristics on a sector-relative basis. While grocery and price sensitivity challenges persist, Darden and its customers have adjusted to smaller portions and price adjustments. New restaurant openings and persisting customer traffic have enabled margins to improve with FY2023 second- and third-quarter top-and-bottom-line earnings beats.

Darden Restaurants Consecutively Beat Earnings for 16 UPward Analyst Revisions

Posting solid growth metrics and excellent profitability, 16 analysts have revised their estimates up over the last 90 days, with zero downward revisions. Third-quarter EPS of $2.36 beat by $0.12, and revenue of $2.79B jumped nearly 14% year-over-year, an increase of $60M. With anticipated sales growth and plans for ~55 new restaurant openings, DRI has increased its guidance for fiscal 2023, highlighting the brand's continued success.

“We now expect total sales of $10.45 billion to $10.5 billion, same-restaurant sales growth of 6.5% to 7%, approximately 55 new restaurant openings, capital spending between $550 million to $575 million…we continue to be very proud of how our teams are managing their businesses to deliver strong results in this dynamic environment,” said Raj Vennam , Darden CFO.

Although the economic slowdown adds pressure to the industry, Darden’s solid margin recovery over the last year is helping to cushion its modest 2%-3% annual unit growth targets. The restaurant industry is extremely competitive, and Darden’s popular brand has developed into an intangible asset that drives traffic and has scale-driven cost advantages. Through strong management, the leverage of technology adoption in the supply chain, and increased efficiencies, Darden plans to expand its footprint and focus on capturing a broader demographic this summer and throughout the year.

2. Coty Inc. ( COTY )

• Market Capitalization: $9.94B

• Quant Rating: Strong Buy

• Quant Sector Ranking (as of 4/27): 2 out of 188

• Quant Industry Ranking (as of 4/27): 1 out of 28

CoverGirl owner and personal care product line Coty Inc. and its subsidiaries offer beauty products worldwide. Although the stock trades at a valuation premium, given its D+ Valuation Grade , COTY’s all-important forward PEG ratio of 0.78x versus the sector median of 2.56x is nearly a 70% discount to the sector. Additionally, the stock has tremendous momentum and has been rallying, +33% YTD and +45% over the last year.

COTY Stock is crushing the S&P 500 performance YTD and over the last year.

On a longer-term bullish trend, the stock continues to be upward, sloping, with a 200-day moving average that’s trending higher to significantly outperform the S&P 500. Boasting A+ momentum that outperforms sector peers by more than 1,000% quarterly, COTY posted strong second-quarter earnings that resulted in 13 FY1 upward analyst revisions and zero down.

13 Wall Street Analysts Revised Estimates Up, 0 Down

Strong free cash flow and improving profitability have reinforced COTY’s ability to deleverage. Named by Deutsche Bank as a “value-oriented opportunity” and “underappreciated” stock in 2023, COTY beat Q2 Earnings , with EPS of $0.22 and revenue of $1.52B, to increase its guidance.

Following Russia’s invasion of Ukraine in February, COTY announced, “After careful consideration, including analysis of relevant U.S., UK, and other applicable regulations, Coty has decided to wind down its Russian operations starting immediately.” While Russia accounted for approximately 3% of COTY sales, adjusting for the exit still managed to crush earnings and revenue growth ahead of guidance in the first half of 2023.

COTY Stock grew across all regions worldwide

In anticipation of adjusted FY23 EPS growth of +20% through the fiscal year 2024, COTY expects modest increases in gross margins, despite FX headwinds and the inflationary environment. As growth accelerates and the company targets more consumers in China who are “more open than ever to try new brands, new innovation, versus traditional,” said Sue Nabi , COTY CEO, the company’s outlook for the second half of the year is strong.

COTY is making a skincare investment for future growth. As its fiscal core like-for-like (LFL) Q3 sales growth continues to accelerate from FQ2, consider this Fearless, Forward, You brand for your portfolio this summer.

3. International Seaways, Inc. ( INSW )

• Market Capitalization: $2.01B

• Quant Rating: Strong Buy

• Quant Sector Ranking (as of 4/27): 8 out of 250

• Quant Industry Ranking (as of 4/27): 7 out of 62

Despite the OPEC+ blow to production , oil and gas demand has risen, which is why I saved International Seaways Inc. for last, a stock consideration to buy on weakness. Where the energy sector has whipsawed from high to low over the last two years, it was the top-performing sector in 2022 ( XLE ), up more than 50%.

The need for oil and gas storage and transportation is crucial now more than ever. Geopolitical headwinds worldwide have resulted in shortages in some parts of the world, while others have an influx, opening the door for one of the largest global tanker companies, International Seaways. Focused on the transport of crude oil and petroleum products, New York-based INSW is benefiting from record-high revenues in 2022, increasing profits and margins while decreasing debt. Continuing its uptrend over the last year, INSW is +92% and +20% YTD.

Undervalued, given its overall valuation grade supported by a forward P/E ratio of that’s a -51% difference to the sector and forward EV/EBIT of more than a 30% difference to the sector, the company’s bullish momentum has allowed it to outperform. Last year, INSW’s company growth doubled in value, and given its current growth grade and profitability, it’s a stock worth considering.

T anker companies are currently labeled as “cash machines” by Euronav , the largest NYSE-listed independent crude oil tanker company in the world. In the same article, investment firm Stifel named INSF its favorite tanker, “trading at the largest discount relative to net asset value and with an expected 9.3% dividend yield.”

Strong earnings resulted in a Q4 EPS of $4.21, beating by $0.56, and revenue of $335.65M beating by more than 260%; INSW produced record fourth-quarter results. One of the strongest years INSW has ever had, sanctions on Russia resulted in increased utilization of tankers and longer ton-miles.

Despite the overall economic outlook appearing difficult, the market remains strong above break-even levels and estimated costs for INSW and the industry. In addition to declaring a combined dividend of $2.00/share to maintain its solid dividend scorecard that includes a ‘B’ dividend safety grade, INSW is a Strong Buy rated stock with many attractive qualities to consider for a portfolio. Consider International Seaways and Coty and Darden for a portfolio going into the summer.

Conclusion

While 'Sell in May And Go Away' has been an adage with expectations of poor performance during summer, nine out of the last ten years have delivered positive returns for stocks from May 1st and October 31st. DRI, COTY, and INSW have solid balance sheets complemented by strong growth and profitability, plus revenue growth. There may be a brief opportunity to purchase these fundamentally strong stocks on a seasonal dip or with fears of a recession.

With earnings beats and bullish momentum to help propel them through the summer, each of the three stocks is rated Strong Buy with upward EPS revisions. Although the macro outlook may be challenging with a Fed continuing to raise rates to tame inflation and recession fears abounding, consider Top Quant Rated Stocks .

Avoid our Sell-Rated stocks with poor fundamentals.

As companies face headwinds, especially those lacking profits, capitalize on stocks with strong financials and shared collective attributes of valuation, growth, and EPS revisions, offering a better opportunity to withstand headwinds while providing an opportunity for upside as the economy rebounds.

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