By: Barry Randall, Crabtree Asset Management
Even investing rookies are familiar with the adage, “Sell in May and go away.” Originally applied by the English horse-y set to neatly summarize their summertime plans, it eventually found an application with professional money managers. And various analyses show there is at least a little wisdom in closing out bullish bets toward the end of April and keeping your powder dry until after Halloween.
From 1990 to 2022 1, the S&P 500 has returned about 2% from May to October, while November to April has averaged about 7%. (Though choosing 1990 as the start date is somewhat arbitrary.) That’s pretty impressive, even to a grizzled vet like me. So should non-professional investors really sell (or perhaps just hedge) their stock market exposure in this way?
The short answer is “no.” The longer answer is also “no,” because in order to achieve the performance, you a) have to believe that 33-year track record is predictive of returns for the next 33 years and b) you have to do it every year to (hopefully) achieve that 7% average return…over that forthcoming 33 year stretch. This is, of course, hopelessly unrealistic. And we haven’t even introduced taxes (always short-term capital gains and losses) and trading costs (no commissions, but bid-ask spreads are their own form of trading expense).
In short, while there’s evidence the market as a whole does better – on average – from November to April than it does during the other six months of the year, there’s almost no way to capture that advantage in the real world over a time frame short enough to be useful. It’s just another form of market timing and it’s empirically proven that market timing generally doesn’t work 2.
As for Crabtree, the once-per-quarter (Tech) and twice-per year (Small Cap Growth) re-balancing cadence works for us because we value quarterly earnings announcements as strong indicators of investment worth. And when a new client wants to invest in either of our portfolios, that money is invested right away, provided it’s appropriate for that client’s goals and risk profile. We don’t wait for November or May.
Mid-November coincides with the winding down of earnings season for the third quarter of 2024. Among the 80 or so holdings in our two Interactive Advisor portfolios (Small Cap Growth and Technology), two companies’ earnings reports and outlooks stood out to us.
Leidos Holdings, Inc. (ticker: LDOS)
Leidos (held in the Crabtree Technology portfolio on Interactive Advisors) is a government contractor based in Reston, Virginia, in the Washington D. C. suburbs. Leidos provides services and solutions in the defense, intelligence, civil, and health markets in the United States and internationally. Most of Leidos’ work is for the U.S. Department of Defense and for Federal-level government agencies. Of particular note is Leidos’ work within its Department of Defense portfolio on cybersecurity, a critical and fast evolving field.
On October 29, 2024, Leidos reported its financial performance for the third quarter ending September 30. The company’s earnings and revenue exceeded Street consensus expectations and company management raised its full year 2024 earnings and revenue guidance to above Street expectations. Bolstering management’s confidence in its new guidance was the company’s book-to-bill ratio of 1.9, implying an acceleration in revenue growth in the fourth quarter as well as in 2025 compared with 2024.
On top of Leidos’ solid operational performance, the company plans to continue its support of shareholders via a regular dividend and through stock re-purchases.
Risks to investing in a government contractor like Leidos include but are not limited to the inherent concentration in its customer base and its vulnerability to disruptions from federal budget-related shutdowns and its exposure to political re-prioritization.
During the twelve months ending on September 30, 2024, Leidos shares rose 78.9%, including dividends. During that same period, the entire Crabtree Tech portfolio rose 18.0% and the NYSE Arca Tech 100 benchmark index rose 38.0%
Viant Technology (ticker: DSP)
Viant (held in both the Crabtree Technology and Crabtree Small Cap Growth portfolios on Interactive Advisors) is an advertising technology company based in Irvine California. Viant sells various on-line services to companies and their advertising agencies that help those companies create and track ad and ad campaign efficiency. These ad campaigns might be for a single channel (e.g., web-based keyword marketing) or multi-channel, bringing in cable television, social media, search engine and other platforms with advertising inventory.
On November 12, 2024, Viant reported its financial performance for the third quarter ending September 30. Viant’s earnings and revenue exceeded Street consensus expectations and company management raised its fourth quarter 2024 revenue guidance to above Street expectations. Notably, Viant’s third quarter operating profit margin rose to 5.0% from -4.7% in the year-earlier period. And along with providing an update on its ongoing stock buyback, Viant management declared in its earnings release that they “remain highly confident in [their] ability to continue capturing market share,” an attitude we value highly.
While there is no guarantee Viant will take share in the future, we like it when company managements are willing to publicize their goals and be judged by how well (or not) they meet or exceed them. To us, the greater risks for investors owning an advertising service company like Viant relate to its exposure to the broader health of the economy and to technological changes, like the evolving usage and acceptance of HTTP “cookies” 3 on popular web browsers.
During the twelve months ending on September 30, 2024, Viant Technology shares rose 97.7%, including dividends. During that same period, the entire Crabtree Small Cap Growth portfolio rose 41.4% and the Russell 2000 Growth benchmark index rose 26.9%.
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VIA SHUTTERSTOCK
FOOTNOTES:
2https://www.investopedia.com/articles/trading/07/market_timing.asp
3https://en.wikipedia.org/wiki/HTTP_cookie#Drawbacks_of_cookies
DISCLOSURES:
“Crabtree Asset Management” and ”Crabtree Fund ” are registered trademarks of Crabtree Asset Management LLC. Crabtree Asset Management is a Registered Investment Adviser. All relevant policies, procedures, regulations and licensing information is available from the appropriate regulatory agency or from the adviser. Please read and consider this information before making any investment decision. Past performance is no guarantee of future results.
If you would like to learn more about the Crabtree Technology portfolio, you may also proceed to this page, at Interactive Advisors, our distribution partner. There you can see performance and analytic data about the Tech portfolio. Information about the Crabtree Small Cap Growth portfolio can be found here.
