As summer approaches, investors consider which stocks to sell before the seasonal slump. Historical trends show underperformance between May and October. However, the Wall Street proverb “sell in May and go away” implies a strategy dealing with just a market pullback.
To make things worse, this year features another challenge— a presidential election year in the U.S. This is likely to introduce more volatility and raise uncertainty as election years tend to perform well. As it challenges the notion of selling in May, other factors must be considered to select the most appropriate stocks to sell.
With slowing GDP growth and stubbornly high inflation, consumer spending and corporate profitability may face constraints. The Fed recently also confirmed interest rates will remain elevated at least through summer. As such, stocks that have already experienced unreasonable upside or are overvalued may now face a reality check. Businesses reevaluate financials and adjust portfolios in May following the earnings season after all.
This mix of factors allows one to scrutinize some stocks to sell and determine whether booking profits or at least reducing exposure might be prudent.
Three specific stocks from the technology, manufacturing, and consumer sectors each possess distinctive challenges that may cause them to dump before the summer slump:
DigitalOcean (DOCN)
With technology stocks often seasonally slow in summer months, DigitalOcean (NYSE:DOCN) may be one of the more obvious stocks to sell. Although a prominent cloud infrastructure provider, it remains a high beta stock. It did see an impressive 20% revenue growth to $693 million last year. However, a meagre diluted EPS of $0.01 and negative shareholder equity pose risks. Moreover, the company’s net margins have fallen 12% on a quarterly basis.
As markets brace for volatility, the company’s Q1 results on May 10 loom. Earnings may face scrutiny as investors have high expectations from the company—notably. Given its high price-to-earnings P/E ratio of 177x and sensitivity to price swings, any disappointment could trigger a sharp response. This is especially true as growth estimates for the next quarter are expected to fall 11%.
Although DOCN’s 14-day Relative Strength Index (RSI) is barely positive at 53%, the software industry trades at 47%. In an environment prioritizing profits, DOCN’s steep valuation, financials, and extended price position it as one of the candidate stocks to sell for those wishing to reduce risk.
Tesla (TSLA)
Tesla (NASDAQ:TSLA) also faces its own challenges that put it on this stocks to sell list. Geopolitical tensions near the Red Sea, a crucial shipping route, pose a threat. An escalation will likely disrupt Tesla’s supply chain for its German Gigafactory and inflate costs. On the macro front, the S&P Global U.S. Manufacturing PMI recently dipped below 50, signaling a contraction in manufacturing—a sector to which Tesla is intrinsically tied.
Company-specific challenges also loom large. Regulatory scrutiny over its driver aid systems, a 53% year-over-year (YOY) EPS decline, and intensifying competition in the EV space are causes for concern. Political turbulence could amplify the market’s aversion to risk with the U.S. bracing for a contentious election season.
As the EV behemoth’s P/E ratio of 43 is nearly 3x the automotive industry average of 16x, it makes a good case as one of the appropriate stocks to sell in anticipation of a possible summer downturn. Its 14-day RSI trades at 56% currently, with a price correction possible on the horizon as the industry trades at 50%.
Levi Strauss (LEVI)
Levi Strauss (NYSE:LEVI) is the odd one out of the stocks to sell in May, as it has enjoyed a 30% rally year-to-date (YTD). However, pressure from high oil prices and slowing economic growth could hurt consumer demand, which may impact discretionary spending on apparel. With its premium positioning, Levis could bear the brunt of this squeeze, as consumers may prefer to choose price over brand. The broader economic landscape doesn’t offer much solace with high inflation and interest rates, either.
With prices pushing its stock to valuations multiples over the industry average, the denim giant trades at a P/E ratio of 70x, nearly4x overvalued the industry average of 19x. While its 14-day RSI hovers at 57, not into overbought territory yet, this is 12% above the industry average.
Despite expecting revenue growth, this is projected to be 3x slower per year. Its EPS also lags behind the broader sector, rising only 6.5% compared to 12.9%. With a dividend payout on May 23, this might trigger profit-taking, given that the company’s earnings payout ratio exceeds 150%. As this signals dividends might not be well-backed by earnings, Levis is the third choice in a list of stocks to sell in May and go away.
On the date of publication, Stavros Tousios did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.