Buy in May and Go Away, Without Worrying

BOSTON ( TheStreet) -- "Sell in May and go away" is an old-school investment aphorism that just won't die.

It means the best strategy for avoiding the stock market's summer doldrums is to park your portfolio in Treasury bills or cash until October.

Leonard Rosenthal, a finance professor at Bentley University in Waltham, Mass., said there's a renowned academic study covering the 80 years through 2006 that backs up the idea of a seasonal market cycle. It concludes that two-thirds of gains in an average year come between November and April.

But given the paltry returns of interest-only investments today, not to mention the stock market's current volatility, what is in essence a recommendation for a market-timing play should probably have been retired along with white-shoe bankers. For one thing, it would have caused its followers to miss the huge rebound in the summer of 2009. Then there are tax issues to consider when selling securities.

And who needs to take such dire action when there are so many other sure-fire strategies to keep a portfolio on boil from a beach chair? A bulletproof portfolio for the next six months should include a mix of large-cap stocks with global exposure, and a couple conservative mutual funds that limit losses in a downturn but also have the potential to post gains.

But, first, on the sell side, it probably is a good time to sell in May if you have a stake in the small-cap sector, advises Bank of America's ( BAC) Merrill Lynch. Those shares climbed over 10% in the first four months of the year. The brokerage unit said in a May 3 research report that, historically, "small-caps tend to fall by 0.5% over the subsequent three months (after an early-year run-up) and by 1.2% when we reach August."

At this time last year, Merrill Lynch said, the Russell 2000 had risen 15% in the same period and subsequently dropped 16% through August. The Federal Reserve's bond-buying program, announced in November but widely expected for two months, boosted small-caps, the brokerage said.

So take those gains and build a portfolio made up of a mix of a few of the following four stocks and two mutual funds. They should keep your summer from being a bummer while you're "away":

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Abbott Laboratories ( ABT) is a diversified health-care company with outstanding long-term growth prospects. It makes and markets pharmaceuticals, from which it gets almost 60% of its revenue, as well as medical devices, blood glucose monitoring kits, nutritional health-care products and, most recently, due to the acquisition of Advanced Medical Optics, eye-care products.

Morningstar gives Abbott a five-star rating, its highest, and one of its analysts said in a research note the company "has dug a wide economic moat. We expect these operating lines will continue to generate strong returns and drive growth.

"Further, the company's adept skills at partnerships and acquisitions probably will add to internal growth," it said. "Existing drugs and new pipeline products should propel long-term growth."

In 2010, Abbott invested some $3.5 billion, or 10% of sales, in research and development, underscoring its commitment to growth.

In the first quarter of this year, the company earned 91 cents per share, up from 81 cents last year, on a 17% increase in revenue.

Abbott's shares carry a hefty 3.8% dividend yield, which outdoes the return paid by certificates of deposit or money-market accounts.

Given its outlook, Abbott shares appear to have healthy upside prospects. Standard & Poor's has a 12-month $58 price target on them, about a 9% premium to the current price. Analysts surveyed by TheStreet give it nine "strong buy" ratings, five "moderate buys," seven "holds" and one "moderate sell."

Shares of the $82 billion company are up 12% this year, on par with its industry peers, but only 9% during the past 12 months.

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Every portfolio needs exposure to tap the gold, silver or oil industries, without buying volatile commodity stocks directly. After all, commodities were decimated last week, with silver sliding 27%, and oil and gold dropping.

Caterpillar ( CAT), which makes engines used to drive heavy construction and mining equipment, is one way to do it.

Although its shares have bulldozed their way to a 19% gain this year and 69% during the past 12 months, there may be more to be had. That's because the company just reported a record first quarter and gave clear signs that its customers, which include miners enjoying all-time highs for their metals, aren't haggling over equipment prices charged by Caterpillar. And that means the company can pass on higher costs to them.

Analysts estimate its five-year earnings growth rate will be 21.5%.

Caterpillar said April 29 that first-quarter revenue rose 57% to $13 billion and earnings per share multiplied to $1.84 from 36 cents. The company raised its projected earnings to $6.25 to $6.75 per share from $6, an estimate that doesn't include the recent acquisitions of MWM Holding GmbH, a German maker of gas and diesel engines, or crane-maker Bucyrus International. Those deals have yet to close.

Standard & Poor's has a "buy" recommendation on Caterpillar's shares and a 12-month price target of $142 on its shares, which represents a 29% premium to its current price.

The S&P analysts said in their analysis that "we still view the stock as undervalued, on our belief that better economic conditions and CAT's aggressive streamlining actions will enable revenues and earnings in the current cycle to far exceed prior records."

A survey of analysts' ratings by TheStreet found 13 "strong buy" ratings, two "moderate buys" and nine "holds."

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For oil-industry coverage, Morningstar has just made a strong recommendation on Halliburton ( HAL), the oil-field-services giant.

Morningstar analyst Stephen Ellis wrote May 4 in a research note that on the international front, the oil industry's first quarter was highly unusual given the shifting events politically in Middle Eastern oil-producing countries, but "the industry is set up for some very healthy growth rates in the later stages of 2011 and early 2012."

Halliburton's services include pressure-pumping of oil shale, drill bits and integrated project management.

There is increasing value in the company's one-stop packaged services as the competition to produce oil quickly has jumped along with the price of oil. "About 50% of Halliburton's North American revenue is made up of just 16 customers, which implies that some of the largest services spenders in the United States have bought heavily into Halliburton's optimized drilling solution," said Ellis.

For fiscal 2011, analysts estimate that Halliburton will earn $2.98 per share and that will grow by 26% to $3.76 per share in 2012.

Standard & Poor's has a "hold" rating on its shares and a $51 price target, a mere 8.5% premium to its current price.

But S&P's review of analysts' ratings found 16 "buys," 17 "buy/holds" and three "holds," about as positive an analysts' rating array as you will find.

Halliburton's shares are up 15% this year and 58% over the past 12 months, giving it a market value of $43 billion.

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Applied Materials ( AMAT), already the alpha dog in the semiconductor-equipment industry as the world's largest manufacturer of wafer-fabrication machinery, strengthened its hand recently with the $4.9 billion cash buyout of competitor Varian Semiconductor ( VSEA), the eighth-biggest maker of semiconductor equipment.

Applied Materials' equipment is used to make tools for the manufacture of chips used in everything from hand-held communications devices, computers and television screens to solar panels.

The semiconductor industry is notoriously cyclical, but it has been in an upward trend for at least the past year as the world economy recovers and demand for chips rises.

Standard & Poor's analysts "forecast that semiconductor-equipment orders will remain healthy in the foreseeable future. We have a favorable view of (Applied Materials') valuation as well as its diversified end markets relative to peers."

The S&P Semiconductor Equipment Index increased 9.5% this year through April 21, versus a rise of 6.7% for the S&P 1500 Index, underscoring the industry's growth.

The Varian deal is expected to add to its earnings on an adjusted basis in the first year. Both Applied Materials and Varian had strong first fiscal quarters this year, beating analysts' estimates.

Another good sign for the company, late in April, Intel ( INTC), a big customer, raised its capital-spending projection for 2011 by an additional $1.2 billion.

Analysts' ratings tracked by FactSet include 10 "buys," two "outperforms," 10 "holds," one "underperform" and one "sell."

Standard & Poor's has a 12-month $20 price target on its shares, a 30% premium to its current price, and a "buy" rating. Its shares are up 7% this year and 15% over the past 12 months, giving the company a market value of $20 billion.

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Investors might find shelter from potential summer market storms, as well as a good shot at asset appreciation, in the $20 billion Loomis Sayles Bond Fund ( LSBRX).

The fund's manager, Dan Fuss, has been at the helm since 1991, and he and his team are considered among the best bond fund managers in the business.

Morningstar analyst Miriam Sjoblom writes that "this fund is about as aggressive as bond funds come. Their strategy resembles that of a value-biased stock manager, and they often load up on bonds in out-of-favor sectors."

The Loomis Sayles Bond Fund takes risks, but it has an exceptional long-term record. It's up 13% over the past 12 months and it sports an 8.5% three-year average annual return.

And if that's not enough, it carries a dividend yield of 5.2%.

The fund's current allocations are: 55% U.S. corporate bonds (including some junk bonds); 21% foreign government debt; 10% convertible bonds; 8% foreign corporate debt; and 3% U.S. Treasury bonds.

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If you decide to take the summer off from trading, yet want to maintain a market presence and had but one pick, the Vanguard Total Stock Market Index Fund ( VTSMX) might fill the bill as a shotgun approach to investing.

This $170 billion fund literally covers all the bases by investing in the entire U.S. equity market as defined by the MSCI U.S. Broad Market Index. It is a passively managed portfolio of 3,387 stocks with an annual portfolio turnover of a mere 5%. It also carries a 1.6% dividend yield and has one of the lowest management fees at 0.17%.

Although it includes small- and mid-cap stocks, the fund tends to track the S&P 500 Index, albeit with a slightly better return. This year, it's up 7.8%, as is the S&P 500, and returned 18% over the past 12 months, 1 percentage point more than the S&P 500. Over three years, the fund has an average annual return of 1.8%, versus 0.64% for the S&P 500.

The downside to the fund is that when the market tanks, it gets clobbered as it did in 2008, when it lost 37% of its value.

Portfolio weightings are based on companies' market value. The top five holdings are: oil-industry behemoth Exxon Mobil ( XOM), computer-industry giants Apple ( AAPL), and Microsoft ( MSFT), conglomerate General Electric ( GE) and computer maker International Business Machines ( IBM).
Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.