Seasonal weakness creates opportunities

History shows that weakness in the May-June period is a rich source of opportunity for investors as fundamentals re-assert themselves over short-term sentiment. With this in mind we are readying ourselves to buy our preferred industrials, and we flag four stocks we are happy to buy now.

Sell in May and go away?

Australian shares display material seasonal weakness in May-June, propagating the old investing adage "Sell in May and go away". There are several plausible contributors:

1. Seasonal commodity weakness;
2. selling to offset taxable income ahead of the End of Financial Year;
3. selling to clean up portfolios ahead of the End of Financial Year (in Australia) or summer holidays (offshore); and
4. potential uncertainty around the Federal Budget.

Resources sector – the correction arrives early

ASX resources stocks surged 17% post Trump's election in the US, but peaked in February and have now given up almost all of those gains. Commodities and mining stocks are responding to falling Chinese steel prices and their own seasonal drivers, albeit earlier than expected this year. This is most likely a function of speculation running too hard on Trump's reflationary promises to begin with. 

We now see strong value in our preferred resources names and advocate layered buying though the seasonal lull.

Ready to buy our preferred Industrials

It's conspicuous that, while resources stocks have corrected, industrials have rallied close to all-time highs (see chart): 

To us this feels too complacent given modest profit growth, abnormally low trading volatility and with geo-political risks in play. We see a risk that the resources pullback and/or typical seasonal drivers could trigger an industrials correction.

Potential seasonal weakness shouldn't alter the investing strategy of long-term investors. However, with ASX industrials stocks looking toppy we are thinking more tactically through this May-June period. Temporary seasonal weakness can often occur without any change to company fundamentals, and this can deliver a rich source of opportunity for investors. 

We have created a shopping list of industrials stocks to watch on a possible pullback, while we also flag four stocks we are happy to buy right now:

• Bapcor (BAP)
• Orora (ORA)
• APN Outdoor (APO)
• Aveo Group (AOG)

By Tom Sartor, Senior Analyst. Sectors Covered:  Resources, Metals. View original blog here:  (VIEW LINK)