Wall Street is littered with cliche statements aimed at imparting subtle wisdom.

• Markets climb a “wall of worry” and usually slide down a “slope of hope.”
• Bulls make money, Bears make money, but pigs get slaughtered
• Cut your losses and let winners run

And today’s most applicable statement is to Sell in May and Go Away.  The statement basically comes from statistical studies which have proven the “October to May” period to have stronger gains than the Summer doldrums.  There are plenty of explanations for this…  The wall street brokers may spend the summer relaxing in the Hampton’s instead of calling prospects.  Investors may use more capital for leisure than for investments.  Or it may be that businesses grow more quickly in winter months as managers hunker down and get work done.

The main question to us as investors is whether to just take the summer off, or stay involved in the markets?  Now believe me, I would love to spend the summer pushing the twins around in the stroller and watching Braves games with my 9-year old.  But honestly, with a little discipline and foresight, this summer could turn out to be one of the most profitable times for us here at ZachStocks.  The following are some themes which will likely shape the character of our markets in the coming months:

Alternative Energy

We have been a bit early to the party with this sector.  Unfortunately, the global economic crisis put the need for alternative energy solutions on the back burner as governments struggled to prop up financial systems which were in danger of crashing.  But whether the recovery comes quickly, or takes a process of several quarters, the focus will likely return to this important investment category.

Alternative energy has the benefit of being backed from not just an economic standpoint, but also from a political and social perspective.  The Obama administration still expects to create a significant number of “green collar” jobs as initiatives for wind, solar, and other alternative power are put into place.  Across the globe, governments are requiring stricter emissions regulation and generating more electricity from sources other than fossil fuel.

This past week, First Solar, Inc. (FSLR) reported that costs are decreasing to a point where it makes much more economical sense to install solar panels for energy consumption.  The stock ran up sharply, and optimism is beginning to spread to other stocks trading in the same or similar industries.  This summer I expect attention to revert back to alternative energy both politically as well as economically.

Investment names to consider in the alternative energy names include First Solar, Inc. (FSLR); LDK Solar Co., Ltd (LDK); Yingli Green Energy Hold. Co. Ltd. (YGE) and Energy Conversion Device (ENER).  (The ZachStocks Growth Model holds a position in FSLR, LDK and YGE).  We are currently offering a free 30 day trial to the model.

Inflation

It should come as no surprise that with the government printing massive amounts of paper currency to shore up bank’s balance sheets and bail out failed businesses, that this currency will eventually lose some of its value.  Now up to this point, the lack of economic growth has saved us as the dollars have been used simply to pay down loans or take a debt consolidation instead of stoke an economic recovery.

But looking further down the road, inflation is certainly a concern and could become disastrous if the Fed continues to run the presses at breakneck speed.  As investors (and really as consumers, workers and citizens) we want to protect the spending power of our wealth much more than just the dollar amount of our savings.  This will likely become more difficult in the coming months once some economic stability is seen.

In order to combat inflation, the best course of action is to own “stuff” that retains its value regardless of what currencies are doing.  Now it may not be feasible for you to load up your basement with grains, stuff gold under the mattress, and stockpile guns in your attic (I’m not sure I really agree that things will be that bad), but there are some investment decisions that can be made which can protect your spending power, and quite possibly increase your real wealth over the coming months.

Precious metals come to mind first and if you have a plain vanilla brokerage account it is very easy to invest in GLD and SLV (ETF’s which trade in lockstep with Gold and Silver prices).  You can also own an ETF geared toward agricultural commodities such as DBA.  Finally, I think an investment in Intrepid Potash, Inc. (IPI) could lead to out-sized gains as agricultural producers look to Potash fertilizer as a way to increase yields. (The ZachStocks Growth Model also holds a position in IPI)

Growth At a Reasonable Price

Growth At a Reasonable Price (or GARP) is an over-used phrase on Wall Street.  The idea is that growth stocks are only attractive if you don’t have to pay out the nose to own them.  It can be extremely disappointing to find a company that is performing exceptionally well, and then realize that to own them you must pay 45 times earnings.  There are times when buying growth stocks at nearly any price can yield strong trading gains.  But in today’s market, buying at inflated prices is just asking for trouble.

Despite the sour mood carried by many growth stock investors, I have actually found quite a few attractive opportunities with reasonable prices.  The key is understanding exactly what forces are driving long-term growth, and figuring out the variables that could represent risk.  Once you have a clear understanding of how a particular business works, what the long-term plans are, and what challenges could get in the way; you have the necessary pieces to develop a simple reward to risk ratio.  High stock prices by nature beef up the risk side, so it is important to either buy low, or have a very strong outlook for the long-term prospects.

Lately we have been able to pick up several quality growth stocks at attractive prices.  Some names that we have discussed here at ZachStocks include Amedisys, Inc. (AMED), Allegiant Travel Company (ALGT), and First Cash Financial Services, Inc. (FCFS).  (the ZachStocks Growth Model has positions in all three of these names).  More opportunities will undoubtedly arise both as a function of prices being pushed lower as well as companies showing unexpected growth.

Consumer Underperformance

The final theme for this summer carries a more disappointing tone.  Regardless of when the eventual economic recovery occurs, consumers have been shell-shocked and will not be quick to discount the lessons learned in the past 12 months.  Over-leveraged personal balance sheets have left many in an uncomfortable financial position.  Families who lived paycheck to paycheck , found out just how risky this lifestyle is when they lost part or all of their regular income.

So even as the government creates jobs and desperately tries to stimulate economic activity, the average consumer is likely to begin increasing the amount of money put towards saving or paying off debt.  While this activity will likely yield tremendous strength in years to come, it can be very difficult for companies who currently rely on consumer spending to keep them in business.

We have outlined several short opportunities in the past few weeks which have the potential to trade sharply lower due to their high price and questionable growth in this weak environment.  Consumer specific names include Buffalo Wild Wings (BWLD), Rosetta Stone Inc. (RST) and American Public Education, Inc. (APEI).

In conclusion, this summer should offer some exceptional opportunities for traders and investors alike.  The key is to operate a disciplined approach and pay close attention to how trends are progressing.  Buying inflated prices is dangerous, but opportunities exist in sectors that many consider non-traditional or overlooked.

I’m looking forward to serving you throughout the summer!
Zachary Scheidt
Sound Counsel Investment Advisors

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