“Sell in May and go away, come back on St Leger day.”
This stock market adage has been knocking around for centuries. It suggests investors sell their shares in May and buy again after the famous horse race — the last of the five English Classics — run in mid-September.
So, is a strategy of selling all your shares in May and buying them back in September a good idea?
Some historical data would seem to suggest it might be.
However, there are at least a couple of good reasons why it probably isn’t — including one that happens to have been highlighted by an announcement from a FTSE 250 company just last Friday.
Origin
The sell-in-May idea is said to go back to the days when the wealthy aristocratic elite put aside such mundane matters as investing to enjoy the heady round of sporting and social events of the English Summer Season (or, The Season).
Among them, the Epsom Derby and Royal Ascot in June, the Henley Regatta as June turns to July, Glorious Goodwood in July, and Cowes Week, between Glorious Goodwood and The Glorious Twelfth (12 August, the first day of the grouse-shooting season).
And, of course, between them all, a whirl of garden parties, dinners and summer balls.
Persistence
If movements in the stock market were ever driven by the habits of a wealthy aristocratic elite, there’s far wider participation in the market today.
And yet, studies seem to show a persistent phenomenon of lower average stock returns in the summer season than in the winter period.
Easy pickings?
A recent analysis of the last 50 years by trading platform eToro is in line with the general thrust of other studies. It found that the FTSE 100 has recorded a 1.09% average monthly rise from November to April, but a 0.04% average monthly decline over the summer.
Surely selling in May and buying back before winter is a simple way for investors to enhance their returns?
Shortcomings
The studies have shortcomings. A major one is they only measure the price movements of stocks. Dividends and other distributions to shareholders, which are generally a significant part of an investor’s total return, are not included.
For selling in May to be worthwhile, the prices of the stocks you sold don’t just need to be lower come St Leger day, but lower by a degree more than any dividends or other distributions in the period, and the dealing costs of selling all the stocks and buying them back again.
In years when stock prices are little changed, sellers in May miss out on any distributions made to shareholders. And in those years when stocks rise, they miss out on both the distributions and the gains from the increase in the share prices.
And another thing
A further reason why it might not be smart to sell in May is the one I said was highlighted by an announcement from a FTSE 250 company last Friday.
Owning a portfolio of stocks, bought when undervalued by the market, is well aligned with Foolish principles. If the undervaluation persists, the company may well become of interest to other companies in its sector or private equity houses, willing to pay above the prevailing market price to acquire it.
Bombshell
Dechra Pharmaceuticals is a specialist in veterinary pharmaceuticals, and a business with many attractive qualities.
During May, its shares traded between 3,102p and 3,754p. On Friday, just two days into June, the company announced it had received — and was recommending shareholders accept — a takeover offer at 3,875p.
Assuming the deal goes ahead, an investor who sold in May would lose out on a profit of between 3% and 25%.
Bigger and bigger
Missed profits from selling in May can be even more substantial.
For example, the shares of supermarket chain Morrisons traded between 173p and 184p in May 2021. After a summer bidding war, the company was sold at 287p — more than 50% higher than any seller in May would have got for their shares.
And just this week, on Tuesday morning, a small-cap company called National Milk Records, which trades on the Aquis Stock Exchange, has agreed to be bought at a 95% premium to its average share price over the last three months.
Anytime, anywhere
Takeovers of companies at premium prices are far from uncommon. And there’s no close-season for acquisitions on the stock market. Companies anywhere in the market can be targeted at any time of the year.
It’s not like grouse shooting!
