There's an old market saying, "Sell in May and go away." This refers to the fact that the market tends to underperform more in the summer months than in other parts of the year. While a rhyme like that might be fun to say, it's a terrible strategy to make investing decisions based just on the calendar flipping from one month to the next. Not only does it completely ignore the businesses behind the stocks, but it also leads to short-term capital gains taxes, which can get quite expensive.
With that in mind, three Motley Fool contributors picked businesses that looked worthy of holding onto, even if Wall Street's adage does actually apply this summer. They picked Charles Schwab (SCHW 0.23%), Airbnb (ABNB 1.04%), and J. M. Smucker (SJM -0.94%). Read on to find out why, and decide for yourself whether one or more of these stocks may be a good fit for your portfolio.
Image source: Getty Images.
Down, but far from out
Eric Volkman (Charles Schwab): Since I waxed optimistic back in February about the prospects for veteran securities brokerage Charles Schwab, the stock has performed ... not well. The collapse and subsequent government-backed rescue of SVB Financial and Signature Bank the following month put many financial companies under the microscope. Under such scrutiny, Schwab was found wanting.
What investors feared was large-scale deposit erosion, a catalyst of the SVB/Signature flame-outs. The worry was that Schwab's depositors would also shift their savings en masse to other financial services providers seen to be larger and healthier. The deposit exodus certainly is happening to an extent with Schwab -- hence the panicky sell-off -- but it's all part of the game for the sprawling financial services company.
Schwab kept posting encouraging growth in headline financials even as client cash balances shrank in the second part of the 2010s (at a scary-at-first-sight 20% rate from 2015 to 2019). Ditto for the company's first quarter of 2023, which alone witnessed deposit shrinkage of 11%.
Remember, while Schwab functions as a bank, that's only a minor part of its business. All told, the company manages 1.7 million banking accounts, which sounds like a bunch; however, it's dwarfed by its nearly 34 million brokerage clients. Meanwhile, over 80% of said deposits are insured by the government's Federal Deposit Insurance Corp., a far, far higher rate than those of SVB Financial. On top of that, the company's liquidity is strong. It said recently that according to its calculations, it has roughly $100 billion in cash flow at its disposal, a massive pile by any standard.
Even in the face of a certain amount of depositor migration Schwab's fundamentals continue to rise. Total net revenue advanced by almost 10% year over year in that first quarter, to more than $5.1 billion, while headline net income vaulted even higher (by 14%) to $1.6 billion. And at the start of this year, it declared a 14% dividend raise, sounding a loud note of confidence in its business.
Checking out? More likely to check in to this stock
Jason Hall (Airbnb): As of this writing near mid-May, shares of Airbnb, the tech version of a hospitality company, are down over the past year. The gist of the sell-off is, despite the company reporting a first-ever Q1 profit and a growing pile of cash from its free-cash-flow printing machine, investors are worried about slowing growth. And I get it; after a few years of rocket-like growth during and directly after the worst of the pandemic, it does seem that people are beginning to ease off on travel. After 24% adjusted revenue growth to start the year, management expects 12% to 16% revenue growth in the second quarter.
And if there's one thing the market doesn't love from pricey growth stocks, it's slowing growth.
So why am I holding? In short, I've been expecting -- as should you -- a slowdown in growth. But looking beyond that, I still believe Airbnb can continue growing revenue at a mid-teens rate for many years to come, and maybe accelerate that a little bit. Most importantly, the stock is starting to get attractive for me as a buy; at the post-earnings stock price, shares trade for -- based on my expectations of about $4 billion to $5 billion in free cash flow this year -- between 14 and 17 times this year's free cash flow. Now, if you factor in the $1 billion in stock-based compensation, it's closer to 20x the estimated 2023 "true" free cash flow.
That's not cheap, but it's getting pretty attractive. Instead of selling, Airbnb keeps moving higher up my list of stocks to buy.
We all have to eat
Chuck Saletta (J. M. Smucker): As inflation has made it tougher to make ends meet, my lunches now contain a higher proportion of peanut butter and jelly sandwiches than they used to. In addition, my coffee intake these days is almost all either home-brewed or the free-to-me variety that my office supplies.
While I'm actively making choices on ways to keep my costs down, I can't help but notice that one company in particular -- J. M. Smucker -- is getting a disproportionate boost from those choices. J. M. Smucker owns Jif peanut butter, Smucker's jelly, and Folger's coffee, among other brands that fall in a similar vein of everyday consumables.
Whether we're in for continued inflation or the long-predicted recession strikes, that brand portfolio provides a great reason to believe that J. M. Smucker should still see continued demand for its products. On top of that, the company sports a reasonable valuation of less than 19 times its forward earnings estimates, a 2.6% yield that is well covered by its earnings, and a modest debt-to-equity ratio of 0.5.
That total combination of factors paints a picture of a fairly boring business that looks capable of continuing to deliver, almost no matter what happens in the rest of the world. It might not be the most exciting company on the planet, but it is one of which I am a shareholder and have no plans of lightening up my position this May. There's enough craziness going on in the market and economy right now that a little bit of boring may very well turn out to be a good thing.
Perhaps May could turn out to be a buying opportunity
Charles Schwab, Airbnb, and J. M. Smucker all have a lot going for them when it comes to their longer-term prospects. In part because of that, these Fool contributors are happy to hold on to their shares, even as the month of May is well upon us. If the old Wall Street saying turns out to be true, then a rough May might turn out to offer a buying opportunity for those companies.
That makes now a great time to figure out if you'd be willing to own any of those companies -- and if so, at what price. That way, if "sell in May and go away" does end up offering those companies at a tremendous value, you'll be there, ready to swoop in to buy.
