You'll Wish You Sold These 3 Stocks Before Summer

Key Concepts

• Market Breadth: A measure of how many individual stocks are participating in a market rally.
• "Sell in May and Go Away": A seasonal investment strategy suggesting that stocks perform worse from May to October compared to November to April.
• Contrarian Investing: An investment style that involves going against prevailing market sentiment or analyst consensus.
• Off-Balance Sheet Obligations: Financial commitments that do not appear on a company's primary balance sheet, often used for large-scale infrastructure projects.
• Capex (Capital Expenditures): Funds used by a company to acquire, upgrade, and maintain physical assets like data centers.
• 200-Day Moving Average: A technical indicator used to determine the long-term trend of a stock; trading below this is often viewed as a bearish signal.
• Free Cash Flow Negative: A state where a company spends more cash on operations and capital expenditures than it generates.

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1. Market Outlook and Seasonal Trends

Mark Likenfeld notes that while the market is currently strong, there are underlying concerns regarding market breadth, as not all stocks are participating in the rally. Regarding the "Sell in May" adage, Likenfeld clarifies that while historical data (since 1945) shows the November–April period outperforms the May–October period (7% vs. 2% gains), the latter is not inherently negative. He argues that long-term investors should not attempt to time the market seasonally, though he acknowledges that the current AI trade could potentially disrupt historical summer slowdown patterns.

2. Stock Analysis: Three "Sell" Recommendations

A. Dexcom (DXCM)

• The Case Against: Despite a positive consensus from Wall Street analysts (24 out of 27 are "Buy"), the stock has been in a five-year downtrend.
• Key Factors: Intense competition from Abbott Labs (Freestyle Libre), FDA warning letters regarding manufacturing quality, and the disruptive impact of GLP-1 drugs on diabetes treatment.
• Contrarian Perspective: Likenfeld warns against "group think" among sell-side analysts, who often avoid "Sell" ratings to maintain investment banking relationships. He emphasizes: "Do you want to be right or do you want to make money?"

B. Colgate-Palmolive (CL)

• The Case Against: Likenfeld views this as a "boring" stock with no momentum.
• Key Factors: Lack of brand loyalty in non-toothpaste categories (e.g., dish soap) as consumers shift to generic brands due to economic pressure. The stock has been stagnant for two years, and there has been consistent insider selling with no recent purchases.
• Valuation: Trading at ~23x earnings with low growth (3–6%), it lacks the defensive appeal of other sectors like utilities or big pharma.

C. Oracle (ORCL)

• The Case Against: Likenfeld identifies Oracle as a potential "poster child" for an AI bubble burst.
• Financial Risks: Oracle has $250 billion in off-balance sheet obligations for data center construction through 2030. They are currently free cash flow negative ($25B expected this year) and have $125 billion in existing debt.
• The "OpenAI" Risk: Oracle’s revenue projections rely heavily on OpenAI’s ability to pay for compute services. With OpenAI’s own CFO expressing doubts about revenue growth, Likenfeld fears Oracle will be "left holding the bag."
• The Paramount Wildcard: Larry Ellison (Oracle founder) has personally backstopped a $40 billion deal for Paramount. If the deal faces issues, Ellison might be forced to sell Oracle stock to cover the commitment, creating a potential downward spiral for shareholders.

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3. Methodologies and Frameworks

• Technical Analysis: Likenfeld prioritizes stocks trading above their 200-day moving average. He avoids "catching falling knives" (trying to buy at the absolute bottom) and prefers stocks with established upward momentum.
• Defensive Positioning: When seeking safety, Likenfeld prefers companies with actual growth and dividends, such as utilities (e.g., Black Hills - BKH) that benefit from data center energy demand, rather than stagnant consumer staples.
• Analyst Sentiment Analysis: He monitors extreme bullishness as a contrarian indicator, noting that analysts are incentivized to maintain "Buy" ratings to secure future investment banking deals.

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4. Synthesis and Conclusion

The core takeaway is that investors should prioritize financial health and momentum over analyst consensus and historical seasonal patterns. Likenfeld argues that in the current high-interest-rate and high-inflation environment, companies with weak balance sheets (Oracle), stagnant growth (Colgate-Palmolive), or intense competitive headwinds (Dexcom) are poor investments, regardless of their popularity or "defensive" reputation. He advises investors to remain skeptical of "this time is different" narratives, especially when they involve massive capital expenditures that lack a clear path to profitability.