“Sell in May and go away” is an old saying in the investment world — probably inspired by the desire of stressed traders looking forward to their beach holidays!
However, robust statistical studies, covering several decades, have proved that investment returns are on average, considerable lower between May and October than between November and April. The evidence indicates further that the strategy works globally. In Canada, the winter period returns were on average 7% better than the summer returns and 6.5% in the case of the U.S. equity market.
Perhaps it is then a good time to review the equity portfolio — a late spring clean-out. The idea is to make sure every stock deserves its position in the portfolio and sell those holdings where valuations look stretched.
The stocks discussed below have all performed extremely well over the past year or longer, stock valuations are full, and in some cases the debt levels are high. Investors will probably experience poor investment returns from current price levels.
Canadian Pacific Railways (TSX: CP)(NYSE: CP) is a top quality company undergoing a transformation under new CEO Hunter Harrison, appointed in June 2012. However, the share price has almost tripled from the September 2011 low and has increased by 140% since the appointment of Mr Harrison.
The stock is fully valued at a 21 times 2014 price to earnings ratio and is also priced at a considerable premium to its regional peers, even after taking into account the possibility of further value extraction by Mr Harrison.
Thomson Reuters (TSX: TRI)(NYSE: TRI) has been struggling for a number of years but the largest division, Financial and Risk, has been undergoing a major reorganisation in the past two years. Scant evidence of any improvement has been evident to date and the latest results was only boosted by the deferral of further restructuring charges. Investors may have to wait for another year or longer before the overall business starts to grow again.
The share price has moved up by almost 50% over the past 18 months and from this price level, the growth prospects do not justify a premium valuation of 19 times 2014 profits per share.
Valeant Pharmaceuticals (TSX: VRX)(NYSE: VRX) is a serial acquirer of pharmaceutical companies. The aggressive acquisition strategy worked well, with the sky-rocketing share price reflecting the success of the strategy.
However, the share price has moved up by almost 200% over the past two years, valuations are full, debt levels are high, and the company is taking on a large acquisition target with a $46 billion offer to Allergen shortly after the $8.6 billion Bausch and Lomb acquisition
Magna International (TSX: MG)(NYSE: MG) has been performing well over the past few years recovering with the auto industry from the 2008/09 financial crisis. However, the share price has moved up by 730% from the 2009 low and has doubled since the start of 2013.
The stock is not overly expensive at the current price and the first two quarters of 2014 may continue to deliver decent profit growth. However, the operational risk in a cyclical, capital intense industry remains high and a modest volume decline could result in a significant drop in profitability.
Constellation Software (TSX: CSU) owns a large portfolio of software businesses and continues to add to the portfolio on a regular basis, including six smaller acquisitions in the first quarter of 2014.
The share price has increased by almost 500% over the past four years and by 83% over the past year. Although profit growth continues to be solid, the valuation is full at 15 times 2014 EV/EBITDA — good growth prospects are already factored in. In addition, debt levels are reasonably high placing an additional level of risk on the business.
