It is that time of year again.  It is time to ponder the theory of pricing in a summer slowdown, whether it actually happens or not.  In short, is time to “Sell in May and go away?”  2012 could be different.  After all, this is an election year and it is not as though the U.S. is in the same spot it was in during the 2008 election.  2012 also faces the challenges of the larger European nations, as well as very sluggish reports from the growth markets of China, India, and South America.

Many investors might actually hope that we do get a 10% correction so that they can get into stocks again.  Recent reports have shown that the average investor has still shied away from stocks in favor of the safety of bonds.  The DJIA peaked above 13,300 in March after having ended 2011 at 12,217.56.  It is hard to imagine this, but the DJIA had a low of under 6,500 in early 2009 at the peak of the panic selling.  That was back to 10,000 by October of 2009 and the market is above 13,000 at the current time.  Is it possible that the DJIA has really doubled from the lows and Joe Public has not participated at all?

We want to take a look at the valuations, dividend yields, performance, and underlying trends driving some of the key industry leaders which have already reported earnings and offered guidance in order to get a better handle on what to expect for the coming summer.

Chrysler is also acting as a strong barometer for U.S. auto sales, even if the highly-volatile durable goods orders have been weak for two months.  While the retail segment is marred by a couple of undercurrents right now, sales have remained positive in 2012 when some were expecting some negative overall numbers. Now we also have a fresh report calling for at least 8% dividend growth from DJIA stocks this year and the components have so far been hiking dividends above what was expected.

We have taken a look at the following: Bank of America Corporation (NYSE: BAC) and J.P. Morgan Chase & Co. (NYSE: JPM) in banking; General Electric Co. (NYSE: GE) as the conglomerate leader (and economic barometer); Alcoa Inc. (NYSE: AA) as a leading indicator of the metals markets; Caterpillar Inc. (NYSE: CAT) as the construction and super-heavy equipment leader; Microsoft Corporation (NASDAQ: MSFT) and Intel Corporation (NASDAQ: INTC) as the tech leaders; Apple Inc. (NASDAQ: AAPL) not as a DJIA component but as an asset class; and Exxon Mobil Corporation (NYSE: XOM) and Chevron Corporation (NYSE: CVX) as the American leaders in Big Oil. We also want to consider E. I. du Pont de Nemours and Company (NYSE: DD), or DuPont,

A Recent History of “Sell In May and Go Away”

2009 was a very different year because the market was recovering from the crash and stocks were still benefitting from that move.  2010 was a nasty start of summer as investors worried about a double-dip recession as housing prices continued to sink and unemployment was still a prime concern.  We also faced that punishing event called ‘The Flash Crash.’ Another big distraction was BP PLC (NYSE: BP) for its disaster in the Gulf and America and the rest of the world was starting to consider some problems in nations called the PIIGS.  The market peaked around 11,300 in late April and had sunk to a 9,800 by early May.  Even around July 6 the DJIA was only around 10,200 and was only back up to almost 10,500 after the end of August around Labor Day.

2011 felt close to a repeat of 2010 with the worries not just about the PIIGS but about the possibilities of a U.S. debt rating downgrade which did ultimately come.  Housing was still in the tank and employment was not yet in a full-blown recovery in America. While the end of April to the end of May did see a drop of 800 points in the DJIA from almost 12,900 in late April and early May to just above 12,000 by late May and 11,900 by late June, it was late-July and August which were the cruel months for the DJIA as companies began to suffer serious earnings concerns. The DJIA bottomed out just under 10,600 in August.  By late-October the market was back above 12,000 again.

So, here we sit at the end of April in 2012 with a long road of political hate ahead of us, and an economy that is still sluggish but one which not go into recession.  Right now the labor data is still choppy even though unemployment is down to 8.2% due to lower labor force participation rates.  Earnings growth has slowed down and Europe remains a key concern with the stable European nations being a concern on top of the PIIGS.  The good news is that equity values remain attractive and the FOMC is still pledged to a policy of maintaining an “exceptionally low rate policy” through the end of 2014.

The Leading Companies As Economic Barometers

Bank of America Corporation (NYSE: BAC) and J.P. Morgan Chase & Co. (NYSE: JPM) are the two DJIA money-center banking leaders and they are both at discounts to their respective book values.  Both banks turned in earnings reports that show some stabilization even if mortgage woes remain a hangover from yesteryear.  2012 has also been a period of incredible recovery from an awful 2011.  Bank of America effectively doubled from trough to peak from late 2011 to the end of the first quarter and at $8.26 it has a consensus analyst target of effectively $10 that implies upside of close to 21%.  J.P. Morgan is around $43 it has risen 35% from trough to peak from late 2011 to the present time.  Its dividend yield is back up to almost 3% and the price target of about $52.80 implies upside of almost 23%.

General Electric Co. (NYSE: GE) recently confirmed that its earnings were still on the mend and it remains the conglomerate which the market tries to use as a proxy for the American economy. Its GE Capital is expected to soon be in a position to start paying a dividend back to the GE parent company.  The company raised and raised its dividend over the last year and it is now back to a yield of 3.5% with the promise to grow its dividend at about the same rate it grows its earnings.  With expected earnings growth of more than 10% for 2012 and 2013, investors buying GE might be sitting on a theoretical dividend yield at their cost basis of over 4% at some point next year.  Shares are up 9.5% year to date at just under $19.50, and the consensus analyst target of about $22.50 implies upside of about 15%.

Alcoa Inc. (NYSE: AA) is one we always argue against as a true metals and economic barometer but it is always the first DJIA component to report earnings each quarter and the only dedicated leading metals component in the DJIA.  Shares are currently around $9.80, which is still up about 5% from its pre-earnings level of $9.32.  It is also still down from $10.02 at the end of March.  Thomson Reuters has a consensus price target of $11.85, indicating upside of 20% or so over the next year.  Alcoa still maintains that the global aluminum market will double this decade.

Caterpillar Inc. (NYSE: CAT) may have reported that its profit jumped 29% in the first quarter and it may have tried to talk up its internal guidance, but shares fell from $108.40 before earnings to $103.44 the day after earnings.  The market may have some valuation concerns here with the growth markets faltering more than the company claims, but the stock is now down more than 10% from recent highs of over $116.00 and its consensus analyst price target north of $130 implies upside of more than 25% if the analysts are correct.  This one also trades under 11-times expected 2012 earnings estimates.

Microsoft Corporation (NASDAQ: MSFT) and Intel Corporation (NASDAQ: INTC) both managed to turn in decent earnings reports with low valuations, but Microsoft was probably left with a bit more upside as Intel was getting more fully valued.  With Intel at just under $28, its 52-week range is $19.16 to $28.78.  It offers a 3.1% dividend yield, but the consensus target has been raised to only $29.65 and that implies upside of only about 3.1%.  Microsoft, on the other hand, trades around $32.20 and its 52-week range is $23.65 to $32.95. Its yield is less at about 2.5%, and its consensus price target objective of $35.40 indicates an expected upside of just under 10%.  Intel trades at only about 11.2-times expected 2012 earnings versus about 11.8 times for Microsoft (or 10.6-times if you use fiscal June-2013 estimates).

Apple Inc. (NASDAQ: AAPL) is not a DJIA component but it is almost its own effective asset class at this point.  The shares were literally on their way to a 10% correction for the two weeks ahead of earnings, but this was after a 50% rise from the start of 2012.  Shares are back up at $610 and the company is truly an earnings beast.  With huge growth rates, it trades at only 13.1-times expected September-2012 earnings and only 11.3-times September-2013 earnings estimates.  While the consensus price target is now over $700 and implying upside of about 15%, some calls have surfaced for Apple to be worth closer to $1,000 or even higher.

What about Big Oil? Exxon Mobil Corporation (NYSE: XOM) and Chevron Corporation (NYSE: CVX) are likely to depend upon the price of oil going forward, but these two DJIA components both just raised their dividends on the same day in late-April.  Exxon raised its payout 21% and Chevron raised its payout by 11%. Chevron still leads the dividend race with a yield of almost 3.5%, and at just under $104 its 52-week range is $86.68 to $112.28 and its consensus analyst target of $125.25 implies upside of close to 20%. Exxon now yields about 2.7% and at just under $87 it has a 52-week range of $67.03 to $88.13 and its consensus analyst target is almost $95 for almost a 10% upside.  Exxon trades at about 10-times 2012 expected earnings versus only about 8-times earnings for Chevron.

E. I. du Pont de Nemours and Company (NYSE: DD), or DuPont, managed to recently beat its earnings as its agriculture unit is strong and as its chemicals and materials unit is being propped up by electronics makers.  With an earnings range provided of $4.20 to $4.40 per share for this year, DuPont’s price of almost $54 implies an expected earnings multiple of about 12.5-times for this year.  A consensus price target of $58.20 generates an implied expected upside of only about 8%.

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Perhaps the real question to ask is whether or not 11 companies can really give you a ballpark or a barometer for what lies ahead for the broader economy.  The DJIA Transportation Index has not offered much insight using Dow Theory.  This index has been range bound for most of 2012, which offers a no-man’s land expectation.  Maybe the real notion should be that the market can still rise as long as the transport index does not fall apart.  Maybe it implies that a “Sell in May and go away” outlook is still the right outlook but one that will not face as sharp of selling ahead.

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JON C. OGG

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