Taking Stock

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Tony Crowell
Tony Crowell
Farewell ‘til September

One of the many veteran Wall Street sayings is Sell in May and go away, come again after St. Leger’s Day. St. Leger’s Day, Sept. 14, has been commemorated in England since 1776 [!] by the St. Leger Stakes, the final race in England’s Triple Crown. The English climate forces most famous sporting events to the summer months, thus the saying was spawn on the assumption that trading activities in “the City,” London’s Wall Street, would slow to a leisurely walk until the fall.

Studies do indicate lower market performance during the five-month summer lull, however, the difference is insufficient to justify selling without significant other reasons. Many economists and investors seem to regard the markets as rational and quantifiable. Their results would benefit if they paid greater attention to emotional mindsets, which John Maynard Keynes defined as “animal spirits.”

A probable summer slowdown hardly justifies widespread selling; it suggests tuning in anticipation of changing trends. The leisure and multimedia sectors have done well in this period. Disney (DIS-$108) is a leader in both these sectors. One of my clients pointed out that a company’s ability to raise prices is a good indicator of its future sales. All parents know that Disney certainly is not challenged in this respect.

Disney will report quarterly earnings after the bell on Tuesday, May 5. Street estimates look to around $1.10 per share, about the same as a year ago, on an expected 5% sales increase. Its biggest quarter ends in September after the summer holidays, so forecasts, particularly of expected sales will be widely watched.

Its stock is somewhat pricey, trading at 24 times earnings. Over the last five years, earnings have increased 19% annually. Forecasts for the next five years look to annual growth of 14%, still quite impressive for a company with over $50 billion in sales, growing recently at 7%.

Disney stock has averaged on earnings announcements a 3% price change. Adding to positions before the next release seems timely. The oil price drop probably added to theme park revenues.

The food and retail sectors also have good records during the summer periods. Starbucks (SBUX-$49) fits nicely. Its growth beats Disney at 20% annually for the last five years with almost the same forecast for the next five. Starbucks is thus valued higher at 32 times expected earnings. It offers a 1.3% dividend yield with four years of increases.

For years, Starbucks has crushed the cynics who predicted doom for any company selling a cup of coffee for more than a dollar. It not only grew but also developed a good reputation for ethics. Starbucks employees 150,000 in the U.S. and 300,000 worldwide. These are mostly young people, whom the company names as “partners.”

The company has hired 2,000 “partners” through a program to hire veterans and military spouses. It recently began another program to help its “partners” earn college degrees online. Its founder, Howard Schultz, calls it “a company with a conscience.” It is innovative, recently beginning a new format of small stores, including one just across the Street from the New York Stock Exchange.

With the trading week almost over, stocks are giving up their April gains, which took the averages into positive territory. There are not any new reasons for this selling nor are there any dramatic headlines to encourage buyers. Common sense should suffice but it seldom does. Fearful “animal sprits” prevail. Investors who assess the impact of these emotional mindsets of the May to September doldrums will do well. These lines may help maintain investor perspective:

 

Oh, it’s a long, long time from May to December-But the days grow short when you reach September.

 

Tony Crowell manages stock portfolios for individuals and their trust and retirement accounts with CROWELL•ROBERTS Investment Counsel, a registered investment advisor in Laguna Beach since 1995. [email protected] 949.494.1376/800.697.2622

www.crowellroberts.com

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