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Sell in May (or June) and Go Away?

We know the old adage to “Sell in May and go away,” right? Well, it’s not May, but it’s close enough, and I find myself asking, “Should we sell? If so, which stocks are the best sell candidates?”

Long-term investors, like we here at Motley Fool, do not generally pay attention to these seasonal patterns; however, with the TSX trading at all-time-high levels and with worries about the consumer, debt, housing prices, and heightened geopolitical risk, it may be wise to single out those stocks that we feel are due for a breather in the hopes of sparing ourselves the pain of losses, and with the intention of getting into companies that are good long-term buys.

So, while we should not blindly sell in response to this old adage, we can take the opportunity to reduce our exposure to those stocks that are too richly valued, regardless of any seasonal pattern, either by selling a whole position or by embarking on a less dramatic move and lightening up on a position.

Canopy Growth Corp. (TSX:WEED) is a good example of a stock that is due for a correction, and what better time to pull the trigger than in the seasonally weak months for the market?

The stock is trading at over 40 times sales (versus over 60 times revenue back in February, so better) and has no real earnings yet. It is one thing to produce revenue, and another one entirely to produce a profitable business. Yet, at over 40 times revenue, the stock is still trading at levels that have a lot of very optimistic assumptions baked in to it.

Another stock that I believe is due for a breather is Dollarama Inc. (TSX:DOL). While this is a completely different story than Canopy in that the company is and has been extremely successful in the retailing world and has shown impressive earnings and cash flow growth, the fact remains that I believe the stock to be too richly valued.

It is a retailer. The retail industry is cyclical, and with the stock trading at over 30 times earnings, it seems that it is essentially priced for perfection.

In summary, these are two stocks that appear to have limited upside and more downside in the short term. In my view, a closer look at our portfolios for more of these stocks would be a good idea at this time.

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Fool contributor Karen Thomas has no position in any stocks mentioned.

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