Doomsday in May approaches, think Cocaine

Well it’s almost that time of year again fellow investors – sell in May and walk away.  Yes, it’s the time of year when investors start thinking more about their tans and the weekend barbecue than their portfolios.  Maybe this is the summer that you get that beach rental, pack of the fam, and go the route of John Candy in Summer Rental. It's time to enjoy yourself with a little R&R and forget about the six month period starting in May and ending in October that historically means a wicked bear market. So what can you expect from the market in the coming months, and do the next six months mean trouble?

The Stock Trader’s Almanac took a look at investing in the two different six month time frames and compounded $10,000 invested into the Dow Jones industrial average over the last 55 years. If the money was invested in the Dow in the "best six months" and then switched to fixed income in the "worst six months," it returned $489,933. If it was invested in the Dow during the "worst six" and moved to fixed income in the "best six," it lost $502. That is quite a variance there people and it's no wonder why when Scully (Rip Torn) asked Jack Chester (John Candy) in Summer Rental: "Hey mate! Good to see you. What can I get ya?" Jack replied with: "How about... drunk." But good ol Rip is no stranger to drinking after being arrested for drunk driving last December in New York. The mug shot is priceless and looks like he didn't fix his hair in time for the camera. Drink much?

But back to the lecture at hand - there are variations within that six month period for investing and returns. May is a crap shoot, alternately very strong or very weak. The third quarter (comprising the months of July through September) tends to be the worst of the year. Although past performance certainly doesn't determine future results, there are plenty of reasons to suggest that this year will follow the pattern. The bull market is aging, oil is near record highs again, gas is surging and it’s not even close to Memorial Day weekend yet - and the major gauges are at multi-year highs… all of which suggests a sell off could be on the horizon.

So what should you do with your millions of dollars?

The StockMasters Position: Your long-term holdings you should leave alone, but your shorter-term ones you may want to move. Where you ask? Cocaine is making a comeback in a major way, and with law enforcement cracking down on the borders, you may be able to make a good return.
But that will just land you in jail. Jokes aside – I’ll give you 3 places that your money could make a decent return in the next months, ranked from lowest risk to highest:

1. Fixed Income: This is a no-brainer. You can’t lose money here.
2. Dividend stocks: See the Top 5 Dividend stocks for 2006 (up 5.16% so far this year, not even counting the dividend yield).
3. Go Bear: Short stocks or buy Put contracts

The Bull Market that’s been running for the past 4+ years has been great. It’s been a good run, and our fellow StockMasters have made a lot of money. But with May looming just around the corner, why not take a chance and look for a stock that is dying to go down, instead of dying to go up? It’s actually a lot easier than you would think. First, I look at valuation – anything trading 75 times forward earnings should make the cut. Next, take a look at the sector. According to the Stock Trader's Almanac July starts a seasonally bullish period for biotech, gold, silver and utilities. Gas prices tend to rise during the summer driving and hurricane seasons - bad news for consumers, but good for natural gas stocks. So steer clear of those if you’re looking to short.

For the most part, common sense should guide you to a stock that is about to see some downside. Here are 2 companies that we’ve pegged that may be a little shocking:

Apple Inc. (AAPL) - have the Stockmasters gone insane? Not at all, we just have the balls to call them like we see them. Don’t freak out just yet, yes they are going to release the iPhone, yes, they have the iPod. But am I the only one who is sick of hearing about Apple every 5 seconds? How long can Apple maintain its “cool” status? If last year is any indication, they will only keep it up until May.
BAM, check out that 1 year chart.

We know you don't want to believe it, but consider all Wall Street really cares about is growth and guidance. For the three-month fiscal second quarter ended March, the analyst estimates Apple to have sold 10.8 million iPods, or about half as many as it sold during the December quarter. The forecast on Macs unit sales came in at 1.3 million and revenue of $1.89M, representing year-over-year growth in units and revenue of 21%. That's stellar, no doubt. But how long can Apple keep up this pace, what happens if they miss estimates, lower a guidance, or just post any bad news - period? With shares trading at almost $100, it doesn't matter how cool Steve Jobs thinks he is or what wonderful product he may have up his sleeve. If you miss an earnings call, the bears will tear you to shreds even if you are the iPodfather:

Next up on our hit list – Research in Motion (RIMM)
How over inflated can a stock get? Take a look at RIMM to find the answer. Yes, they have a forward 2008 P/E of only 30, but I didn’t like it at $125 a share and I really don’t like it at $150. This is just a bad accident waiting to happen people; this May is going to get ugly for RIMM. All the company needs is one piece of bad press and they’ll get a $30 Rim Job.

But they have the all powerful BlackBerry? So what! And today they got kicked in the berries. Yesterday their fiscal Q4 profit surged tenfold from a year earlier, sending sales 66% higher but the stock still fell. Shares of RIMM are down 7% today (4/12/07) because they reported sales that just missed analysts' estimates and left its profit forecast for the current quarter essentially unchanged. Investors had bid up the company's shares to record highs this week on expectations for a more bullish forecast. "It looked like a fine quarter, but certainly not at the level of expectations considering what the stock as done in the past few weeks" said Tavis McCourt of Morgan Keegan, who rates RIMM shares as market perform. Once again America, expectations are everything. Do you really think Research in Motion can keep up its current growth? What about all the great products out there that are competing for the BlackBerry's space? Nokia (NOK), Dell (DELL), Hewlett-Packard (HPQ), palmOne (PLMO), Good Technology, Seven Networks, a passel of Asian device makers, and, yes, even Microsoft (MSFT) wants a piece of RIMM's business. With so much competition and with a stock so overvalued, Research in Motion's days are done for trading over $100 a share.

Last but not least, I give you, the Diamonds Trust, Series 1 - ETF (DIA). The Trust's objective is to provide investment results that generally correspond to the price and yield performance of the Dow Jones Industrial Average. If you want to play the broader market for a downswing, the DIA is your boy. The DIA was just above $115 before it took a $10 dive in May; now it’s all the way back up to $125. All it takes is a little sell off to move this mammoth and we’re expecting another $10-15 Haircut soon.

Good luck to these three wonderful securities over the next 6 months. They all are going to need it.

Think you can still strike it rich with Cocaine? Well now "Cocaine" is an energy drink produced by a Las Vegas company. What's their website you ask? Well it's DrinkCocaine.com of course. It contains no actual cocaine, but is being marketed as "The Legal Alternative" to the illegal drug, according to its Web site. Its logo appears to be spelled out in a white powder that resembles the drug. These guys just have a great idea, don't they? Just like George Jung once had.

Article written by: Eric Cheshier
Article posted on: April 12th, 2007

Disclaimer: The Author owns two contract Put options in AAPL during the time of this publication.