The market is about to head into what is typically a quieter period of trading in May. Many on The Street believe the “Sell in May” rule takes precedence over profits. But that’s not the case with us, as we follow the rule that there is always a bull market to be found.
The answer to the “where to invest in May” lies in focusing on what’s worked in the past, namely the seasonally strong summer stocks. Our database starts by looking at the sectors that thrive through the summer.
For the last five years, the top three sectors have been food and beverage, technology and biotechnology, providing positive results 80% of the time through the summer.
We are focusing our attention to these groups this spring, and we have used our behavioral valuation models to identify stocks that are likely to heat up through the summer based on seasonality, sentiment and their technical strength.
The following are seven stocks to buy before summer. In no particular order …
Stocks to Buy Before Summer: Electronic Arts Inc. (EA)
Video game maker Electronic Arts Inc. (EA) got knocked down a peg when it lowered its guidance last quarter, but the stock is revving-up for a strong summer.
Electronic Arts shares recently put in a consolidation at $65 and are now making moves toward $70 as sentiment remains tepid. Short interest is near its highest readings over the last two years as short sellers are trying to make a buck from future declines, but the fact is that a break above $68 is going to spark a short-covering rally that will add fuel to the stock.
Electronic Arts stock averages a summer return of 18.4% over the last five years and the currently improving trend suggests that investors may want to hang on to this stock through the dog days.
Stocks to Buy Before Summer: O’Reilly Automotive Inc (ORLY)
For many, the summer means lifting the hood on the car in their driveway for some fun. For others, the unpredictable economy means they would rather change their oil themselves to save a few bucks.
For O’Reilly Automotive Inc (ORLY), it’s all good as it all means a busy summer season.
O’Reilly stock has averaged 9% in four of the last five summers, putting it on the list of seasonally strong summer stocks. Currently, the shares are trading back toward their all-time highs after taking a break in late 2015. The company has seen year-over-year revenue growth every quarter for the last two years while beating analysts’ earnings expectations.
Sentiment is bearish toward O’Reilly stock, as only 63% of the analysts covering it have it ranked a buy, despite its relatively strong leadership. Also, the short interest ratio weighs in at a heavy 9.2, telling us that a short squeeze rally is likely to be triggered when the stock moves above $280.
Watch O’Reilly shares to motor through the summer.
Stocks to Buy Before Summer: Ulta Salon, Cosmetics & Fragrance, Inc. (ULTA)
Ulta Salon, Cosmetics & Fragrance, Inc. (ULTA) has been executing its business model extremely well over the last year as it continues to expand its brand. The results: eight consecutive quarters of earnings beats and a YOY revenue growth figure that approaches 205!
Now that ULTA is trading above $200, many think there is nowhere to go but down, but the summer favors this stock as it has traded higher all five of the last summer seasons for an average of 8.7%.
Our models continue to rank Ulta stock as a buy with a target move of 10% or more over the summer as analysts continue to upgrade the shares. Currently, only 64% of Wall Street has it ranked a buy, so there is room for this stock to move higher before becoming a “crowded trade.”
Stocks to Buy Before Summer: Expedia Inc (EXPE)
The summer means travel for many, which is one of the reasons that Expedia Inc (EXPE) stock is among the seasonally strong stocks. Over the last five years, Expedia stock averages an 11.2% return, putting it near the top of the list for consistent performers.
Our model has identified the $105 level as a recent consolidation level that has the potential to launch EXPE higher into the seasonally strong period. Resistance stands above at the $115 mark, but this still gives Expedia shares 9.5% of overhead room before dealing with technical hurdles.
After a rough year of earnings, where Expedia missed analysts’ EPS expectations three of four quarters, the company has seen an improvement in revenue that may provide a fundamental surge for the stock. This would catch the growing camp of short sellers off-guard and trigger a covering rally that would light the fuse on a hot summer for Expedia stock.
Stocks to Buy Before Summer: BioMarin Pharmaceutical Inc. (BMRN)
The biotechnology sector has been taken out behind the shed over the last six months, but some of the names within the group are making a comeback, among them is BioMarin Pharmaceutical Inc. (BMRN).
This stock is breaking through the $90 level, which will garner the attention of technical buyers. The shares are starting to take a leadership role among the biotechnology sector as we head into the summer.
What makes BioMarin Pharmaceutical a standout is its record for summer trading. Over the last five years, the stock has averaged returns of 9.6% each of the last five summer seasons. Our technical models currently have a target of $105 over the next four months — a 15% gain from today’s prices.
Stocks to Buy Before Summer: Cal-Maine Foods Inc (CALM)
Cal-Maine Foods Inc (CALM) will fly below most investor’s radars, but you need to take a look at this summer performer. CALM stock has spent each of the last five summer seasons punching higher, as it averages a summer return of 17.2%.
A positive earnings report recently shot the stock to the $55 level before pulling back to continue a consolidation at $52.50. That said, the trend in Cal-Maine shares is growing stronger as we head into the dog days.
Investor sentiment is the kicker for Cal-Maine right now, as the short interest ratio is a whopping 16.3 and only 40% of the analysts are recommending the stock as a buy. We’re expecting a push above $55 to open the gates on short covering and upgrades which will set Cal-Maine stock up for another strong summer with a target of $60.
Stocks to Buy Before Summer: Domino’s Pizza, Inc. (DPZ)
Domino’s Pizza, Inc. (DPZ) has mostly found its groove again as the stock is trading into a new stratosphere. This doesn’t stop us from tagging it as a summer season favorite.
Domino’s Pizza stock has spent the past five summers racking up an average performance of 14% a year, putting it in the top 5% of food and beverage companies.
The stock recently broke through the $140 level, and even after a quick pullback Friday, shares have posted a one-year return of more than 30%. The Wall Street community has been cold to the stock, despite its returns and overall strength. Currently, only 38% of analysts have it ranked a buy, which is likely to change over the next four months as the stock climbs higher.
Our model forecasts a continuation of the technical climb after this pause, with a target price in excess of $150 over the next four months.
As of this writing, Johnson Research Group did not hold a position in any of the aforementioned securities.