EYE - Sell In May Go Away: 3 Stocks To Avoid

2023-04-25 11:01:13 ET

Summary

• The Wall Street adage “sell in May and go away” is a seasonal trend where investors believe May is the month to sell stocks and stay away from the market until October.
• While this anomaly may not offer the best strategy, as fear of a "mild recession" draws near, avoiding stocks with strong sell quant ratings may help limit your downside risk.
• Market volatility exposes poor-performing stocks.
• I want to share three stocks with poor growth and momentum, limited profitability prospects, and downward analyst revisions that may continue their downward trend this summer.
• Using the Seeking Alpha Quant System and Factor Grades, you can see why these stocks have a rough road ahead and are rated "Strong Sells."

What is sell in May and go away?

Timing the market is virtually impossible. But analyzing the performance of stocks and indexes for months that perform better in an effort to exploit trading patterns and season strength has given way to the investing adage “ sell in May and go away. ”

Some investors believe May is the month to sell and stay away from the market until October, rooted in a seasonal performance highlighting that the market tends to experience its weakest months over summer based on low trade volume, which undergoes a pronounced uptick during winter months known as the Santa Claus rally . Others believe the saying is a trading anomaly with little statistical merit. Whatever your stance, earnings season is underway, and companies' year-over-year growth figures are significantly more skewed than we’ve seen, impacted by the fallout of COVID-19 and the Russia-Ukraine War. As I mentioned during a Wall Street Breakfast podcast ,

“Without question, earnings weakness is still to be expected in many industries. And I think over the coming weeks, this is going to become really evident as companies continue to report. No question, we're definitely already seeing this in sales figures. What this all means is that investors need to be careful, and they should use all available tools to determine what companies are profitable and what companies are proven winners.”

Where market volatility and fear of a "mild recession" has many investors on edge or going to cash, it’s crucial to consider a review of a stock’s fundamentals – whether they carry negative analyst ratings, poor fundamentals, or lag in their sectors – before diving into a position. Consider strong factor grades over poor factors when considering Strong Buys versus Strong Sell stocks.

3 Stocks to Avoid in the Summer of 2023

Seeking Alpha’s Sell Recommendations below have underperformed the S&P 500 for more than a decade using quantitative data because we strive to select stocks that will perform well while highlighting the worst performers.

Avoid our Sell-Rated stocks with poor fundamentals.

Avoiding stocks with questionable performance and severe declines year-to-date can be the difference in portfolio upside and downside. year-to-date, SA Quant Sell, and Strong Sell rated stocks are down 4.24%. Given the challenging economic outlook, the ability to look at and instantly compare a stock’s factor grades to its sector peers or be hit with a warning banner is at high risk of performing poorly.

1. Semtech Corporation ( SMTC )

• Market Capitalization: $1.32B

• Quant Sector Ranking (as of 4/25): 542 out of 594

• Quant Sector Ranking (as of 4/25): 66 out of 68

• Analysts' Downward Earnings Estimate Revisions: 9

• Quant Rating: Strong Sell

High-performing semiconductor company Semtech Corporation has faced its share of headwinds. From chip stocks sell-off on the heels of the Fed’s decision to continue raising rates to softer-than-anticipated economic growth as the U.S. economy prepares for a "mild recession ," likely to mean production cuts equating to a lack of design and potential increases in operating costs. With setbacks abounding and a stock already at high risk of performing poorly, Semtech is a strong sell stock to avoid.

While many semiconductor companies are at the top of their game regarding innovation, Semtech is on a bearish trend and trading below its 200-day moving average. As highlighted below, Semtech’s poor momentum is outperformed by its sector peers.

While SMTC may come at a discount, highlighted by a C+ valuation grade supported by a P/E Non-GAAP ((TTM)) nearly a -60% difference to the sector, you may get what you pay for! Offset by a one-year price performance of -65% and a year-to-date performance of -27%, its undervaluation is challenging to justify the investment, even with a B- profitability grade that has capitalized on the high demand for data centers. Where Q4 earnings were in line with expected results, and the completed acquisition of leading IoT provider Sierra Wireless may offer upside, demand weakness and potential export control headwinds may limit future growth. Additionally, SMTC’s underlying metrics are less than ideal, so evaluating the characteristics of stocks is crucial to avoid losing money.

SMTC’s warning banner highlights to prospective investors its abysmal growth. With an EPS Diluted Growth (fwd) of -19.28% compared to the IT sector median of 10.21%, investing in this semiconductor stock is likely to leave investors with a chip on their shoulders. Consider avoiding this stock while keeping your eyes peeled for the next Strong Sell.

2. National Vision Holdings, Inc. ( EYE )

• Market Capitalization: $1.62B

• Quant Sector Ranking (as of 4/25): 508 out of 538

• Quant Industry Ranking (as of 4/25): 32 out of 33

• Analysts' Downward Earnings Estimates Revisions: 10

• Quant Rating: Strong Sell

Optical retailer National Vision Holdings, through its subsidiaries, offers eyewear and exams through popular retailers like America’s Best, Eyeglass World, and more. Although the Consumer Discretionary sector ( XLY ) is one of the best-performing YTD, National Vision took a nosedive by 35.8% on wider-than-expected Q4 losses resulting from its inefficiencies of going digital amid the progressing remote medicine initiatives and difficulties of the cost environment.

EYE Stock Crashes Following Q4 Earnings Results

When you factor in the inflationary pressures and continued pandemic setbacks, CEO Reade Fahs stated ,

“We ended the year in line with our guidance expectations despite the challenging macroeconomic environment, which negatively impacted the optical industry and especially our core value-conscious uninsured customer base… the pandemic created unprecedented and unique challenges to the optical industry, by not only impacting the historically consistent purchase cycle but also optometrist availability. This has significantly impacted the eye exam capacity for the industry. Of these factors, the one that we believe we can influence the most is recruiting and retaining doctors in an effort to expand exam capacity, albeit with increased levels of investment.”

Year-to-date, EYE is down 46.45%, with a valuation that still comes at a premium. With an overall valuation grade of D+, EYE’s forward P/E is 59.32x vs. the sector median of 14.19x, a 317.92% overvaluation. Even worse is the stock’s forward PEG ratio grade of "F," as a result of it being a 311% difference to the sector.

While the company’s profitability grade offers some redeeming qualities, fourth quarter earnings resulted in an EPS of -$0.08 missing by $0.06, and revenue of $468.93M missing by $2.84M, leading 10 Wall Street analysts to revise their estimates down. Negative EPS revisions and decelerating momentum are key indicators for stocks at risk of performing poorly. Where National Vision’s quarterly price performance is well below the sector median, the company ranks 508 out of 538. It is 32 out of 33 in its industry, a strong indication for a stock to avoid. Next up is DISH Network.

3. DISH Network Corporation ( DISH )

• Market Capitalization: $4.03B

• Quant Sector Ranking (as of 4/25): 227 out of 250

• Quant Industry Ranking (as of 4/25): 11 out of 12

• Analysts' Downward Earnings Estimates Revisions: 6

• Quant Rating: Sell

Sell-rated stock DISH Network Corporation is a well-known satellite communications provider. As the evolution of streaming services dominate how users watch their preferred programs, companies like DISH are struggling to build out their network and business strategy as pay TV popularity declines.

Television Consumption by Source

In addition to its low margins, DISH's system outages and data breaches in February are likely to result in financial repercussions, including fines from the FCC and subscriber losses, adding to the UBS downgrade . Despite DISH trading at a discounted valuation that includes a trailing P/E ratio and trailing Price/Book ratio of more than -87% differences to the sector, its other factor grades are less than stellar.

DISH Stock Factor Grades

DISH lacks growth and profitability. But its momentum also is on a longer-term bearish trend. As investors actively sell shares to drive the price lower, six analysts have revised their estimates down over the last 90 days.

Over the last year, DISH is -76% and -46% YTD. DISH’s business has rapidly declined after peaking with approximately 14.1 million customers in 2013. Since then, DISH has lost approximately 8 million customers every quarter, contributing to its -81% price performance over the last 10 years.

DISH Network has been on a downward spiral since 2013

To strategize and capture market share, DISH spent nearly $30B, or roughly $55 per share, to acquire a wireless spectrum that has yet to come to fruition. Licensing from the FCC does not come easy and continues to be costly. With its $30B investment, DISH will likely continue its struggle against competitors to build a superior wireless network against carriers with a competitive edge.

Showcasing inferior growth metrics, DISH Network’s ROE Growth (fwd) is -66.62%, while the Communications sector median is -2.62%. Unsurprisingly, the stock’s growth and momentum grades are an "F," and it is at high risk of performing poorly.

If you want to invest in stocks with poor fundamentals, like SMTC, EYE, and DISH, there’s much to consider. Evaluate your stocks, especially if they have poor metrics using SA Quant factor grades to help ensure you are furnished with the key information to buy or sell, regardless of the time-honored adage.

Conclusion

Sell in May and go away has been an investor dictum with expectations of poor performance during the summer months. SMTC, EYE, and DISH are stocks with strong sell recommendations experiencing substantial declines. Like many equities in this market, with less than attractive growth, profitability, earnings revisions, and momentum, poor fundamentals are indicators of stocks at risk of performing poorly.

Whether you’re sure or unsure about stocks in your portfolio, check out the grades on your stocks to help ensure you are furnished with the best resources to make informed investment decisions. In a challenging environment on the precipice of a "mild recession," avoid Sell-rated stocks with poor fundamentals. Instead, capitalize on stocks with strong financials and shared collective attributes of valuation, growth, profitability, momentum, and EPS revisions, offering a better opportunity to withstand headwinds.

SA’s Strong Buy recommendations use the same quantitative model that has allowed our "Strong Sell" recommendation to outperform. In times of market volatility, investors should consider investments that will perform well while attempting to avoid those that may fall, especially as the roads lead to the season of "sell in May go away."

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