Last week, yours truly here put the whole “sell in May and go away” theory to the test, crunching all the numbers to determine whether or not it was actually good advice.
Conclusion? It wasn’t.
More after than not, the six-month span that begins in May is — on a net basis — a winner overall, with some surprisingly big summertime gains possible in the right situation.
This isn’t to say the May-through-October period is a winner for all stocks, however. An overbought stock is an overbought stock, and pullbacks from individual names are possible even during the most bullish of market tides. This year isn’t going to be an exception.
To that end, here’s closer look at seven big names that have dished out big gains over the past few months, but have reached prices where the smart-money thing to do is go ahead and lock in a nice profit while you can.
Mylan NV (MYL)
Click to Enlarge Whether Mylan NV (NASDAQ:MYL) ends up being acquired by Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA) or whether it acquires Perrigo Company plc Ordinary Shares (NYSE:PRGO) to stave off the overtures from Teva is largely irrelevant at this point.
With MYL shares up 27% over the past month, the best-case scenario has already largely been priced into the value of Mylan. In fact, if Teva simply decides to bow out rather than up its bid, the fact that Mylan has now offered more than a 30% premium for PRGO shares may end up working against MYL.
In other words, at a price of $73.89, MYL now offers more risk than reward.
Vulcan Materials Company (VMC)
Click to Enlarge A company doesn’t have to have a breakthrough biotech drug to send its stock soaring. Vulcan Materials Company (NYSE:VMC), for instance, makes concrete and asphalt, and VMC shares have gained 58% since making a major low in October.
On the flipside, there’s not enough growth in the asphalt and concrete industry to justify such a move from Vulcan Materials. The forward-looking price-to-earnings ratio of 27.3 just doesn’t make a lot of sense, and the market could figure that out pretty soon.
Monster Beverage Corp (MNST)
Click to Enlarge Monster Beverage Corp (NASDAQ:MNST) has been a surprisingly stable grower on both the top and bottom lines. Between 2010 and 2014, annual sales have grown every year, from $1.7 billion to $2.46 billion, while income has grown from $286 million to $483 million for the same time frame.
The end result of that much consistent progress is the market’s dangerous assumption that the company’s growth never wavers. The evidence? The 110% advance from MNST over the past 12 months, pushing shares up to forward-looking P/E of 35.
With expectations now alarmingly high, any hint of trouble in Thursday’s earnings announcement could end up finally pushing the sentiment pendulum the other way.
Valeant Pharmaceuticals Intl Inc (VRX)
Click to Enlarge Valeant Pharmaceuticals Intl Inc (NYSE:VRX) shares are up more than 100% since August of last year. The rally began on the heels of the news that it, in cahoots with hedge fund manager Bill Ackman, would be making a bid for rival Allergan, Inc. (NYSE:AGN).
Though that effort ultimately failed, Valeant did successfully (and now officially) acquire Salix Pharmaceuticals, Ltd. (NASDAQ:SLXP) in the meantime.
To be fair, Salix and Valeant Pharmaceuticals are a smart fit, although it didn’t come cheap to VRX. Indeed, some feel the 44% premium Valeant ended up paying for SLXP was simply too much, spurred more by a damaged ego following the Allergan debacle than savvy deal-making.
The doubling of the stock’s value in the meantime — right in front of taking on more than $14 billion in new debt for an already debt-laden company — could sooner than later come back to haunt the overbought stock … once investors see an updated balance sheet.
JetBlue Airways Corporation (JBLU)
Click to Enlarge In light of last year’s implosion of crude oil prices — which sent jet fuel prices plummeting — the 115% gain JetBlue Airways Corporation (NASDAQ:JBLU) has dished out since October is understandable.
Given the way crude oil prices have bounced back by more than 20% since March’s lows, however, and the fact that this new uptrend is firming up, the JBLU rally isn’t likely to be sustainable.
Amazon.com, Inc. (AMZN)
Click to Enlarge Yes, Amazon.com, Inc. (NASDAQ:AMZN) rocketed higher after earnings, spurred by surprisingly good news regarding the company’s cloud service division. AMZN shares are up 37% year-to-date alone, thanks to a 14% jump the day after the earnings announcement was made.
As hot as that move was, however, it doesn’t change the fact that Amazon.com still booked a loss for the quarter, and still saw margins on its cloud business shrinking rather than widening.
The only thing that’s changed between now and before earnings? Now AMZN has not one but two major chart gaps beckoning it lower.
In fact, Amazon has been nothing but weak following its post-earnings jump.
Netflix, Inc. (NFLX)
Click to Enlarge Speaking of chart gaps, Netflix, Inc. (NASDAQ:NFLX) is dealing with a couple of its own this year. And like Amazon.com, both of the NFLX gaps were made following earnings announcements. Also like AMZN, however, the stock is already struggling under the weight those gains.
Giving credit where it’s due, Netflix did put up some nice growth last quarter on the heels of international expansion. The top line was up 24% on a year-over-year basis, from $1.27 billion to $1.57 billion … a $300 million increase.
As more time passes, however, the more investors are realizing that the one thing increasing faster than revenue is the company’s liabilities. They grew by more than $700 million last quarter, and that’s not counting another $1.5 billion in long-term debt.
NFLX investors may be starting to wonder how much longer it will take before liabilities and their associated expenses to finally cripple the company.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
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