Trader's Diary

May 9, 2008 6:50 pm

David Schwartz: Maybe or maybe not this May

May has a horrid reputation among UK investors. History teaches us that shares rise in May just over half of the time.  Compared with more profitable months, such as January and April, May is weak. Even so, the long-term record is not as grim as doomsters would have us believe.

Unfortunately, there is one important bear market trend worth thinking about. Since 1949, there were 16 occasions when a bear market was running during May. Prices fell 13 times. Ten of the 13 were declines of at least 4 per cent. For those who believe, as I do, that the bear market of 2007-8 is still underway, history suggests a cautious stance.

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Another point worth considering is that prices often rise in the first few trading days of May, even during losing years. So do not read too much into the FTSE-100’s 2 per cent gain on May 2.

Unfortunately, a new mid-month trend has now arrived on the scene. During the past 10 years, the FTSE-100 fell eight times from May 7 to 26. One of the two exceptions was a gain of just 0.3 per cent, about 19 points on today’s Footsie.

There are no guarantees of course, but a spread bet to the downside might be worth considering in the next few weeks, especially if a fresh advance pushes the FTSE-100 to well above its May 6 closing level of 6215.

Although I worry about near-term Footsie weakness, a number of mid and small-cap shares appear to be dancing to a different drummer. They sometimes gained in recent weeks when the Footsie was weak, or declined when it rose.

One company that caught my eye is Tribal Group. It provides consulting and support services to organisations in the public sector. To my mind, this exposure is a significant plus. It will cushion revenues and earnings should the UK economy falter.

Tribal appears to be on a roll. It recently reported improved financial results for 2007 and increased its dividend. Even better, 2008 revenues are running well ahead of last year. And a recently announced share buyback will reduce the number of outstanding shares by 5 per cent.

Debt is a big worry to many investors these days. According to Robin Speakman of Shore Capital, Tribal recently addressed this issue by selling its Mercury Health division, a significant cash consumer. Proceeds were used to pay down outstanding debt, now below £7m. Speakman thinks that Tribal might be free of net debt by year-end.

I find this riveting. There were several recent acquisitions among the company’s peers. Each had high debt. 

Viewed from this perspective, Tribal’s clean balance sheet and rising profit trend makes it a potential acquisition target or management buyout candidate. For these reasons, I just opened a position in this company. My plan is to sit back and await further developments once the rest of the market catches on.

Stock market historian David Schwartz is an active short-term trader. Send any comments or suggestions to tradersdiary@ft.com

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