Best and Worst Dow Stocks to Target in May

UNH is one Dow stock to target this month

Managing Editor
May 2, 2023 at 11:00 AM
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Subscribers to Chart of the Week received this commentary on Sunday, April 30.

May is just around the corner, and the Dow Jones Industrial Average (DJIA) is up 1.5% on the year, a paltry gain compared to the S&P 500 Index’s (SPX) 7.7% year-to-date gain. While the phrase “sell in May and go away” has some merit, there are some individual blue chip stocks worth highlighting as we start the summer months.

But for starters, how do Dow and SPX stocks do in May, generally? Data from Schaeffer’s Senior Quantitative Analyst Rocky White’s shows that the exchange-traded fund (ETF) tracking the Dow, the SPDR Dow Jones Industrial Average ETF (NYSEARCA:DIA) averages a modest 0.6% gain for the month of May in the last decade, with 90% of the returns positive. The broader SPDR S&P 500 ETF Trust (SPY), on the other hand, boasts a May return of 1.1% in the last 10 years with a 90% win rate.

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The Dow ETF’s return isn’t much to write home about, but there are some individual equities that are outperformers within the blue-chip index. White also compiled the best performing stocks on the S&P 500 Index (SPX) for the month of May in the last decade. UnitedHealth Group Inc (NYSE:UNH) stands out as the best-performing Dow stock of the bunch. Per White, UNH sports an average return of 3.1% in the month of May over the last decade and finished the month higher nine of those 10 times. That's not only the best among Dow members, but also top among health care provider stocks. UNH was last seen trading at $489.61, off by 7.8% year-to-date. Already in the first four months of the year, the shares have traded as high as $530.45 and as low as $457.59.

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UNH options traders have been quite call-heavy. At the International Securities Exchange (ISE), Cboe Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the equity's 10-day call/put volume ratio of 2.52 sits in the 100th percentile of its annual range, indicating the rate of call buying has never been higher in the last 52 weeks.

With earnings out of the way, UNH options are attractively priced right now. This is per the stock's Schaeffer's Volatility Index (SVI) of 19% that ranks just 1% from the lowest percentile of its annual range. It's also worth pointing out that the equity ranks low on the Schaeffer's Volatility Scorecard (SVS), with a score of 5 out of 100. In other words, UNH has consistently realized lower volatility than its options have priced in, making the stock a potential premium-selling candidate.

White also compiled a list of the 25 worst-performing stocks on the SPX in the last decade. Retail giant Walmart Inc (NYSE:WMT) is the lone blue-chip to land on the list. Per White’s data, Walmart stock averaged a -2.2% return for May in the last 10 years, with only 40% of those returns positive. WMT was last seen trading at $151.33 and on Tuesday clocked a nearly five-month high of $153.75. The shares are up 6.7% in 2023, staging a neat bounce off their 200-day moving average back in early March. Puts remain quite popular; ISE, CBOE, AND PHLX data shows WMT’s 10-day put/call volume ratio of 1.49 sitting just six percentage points from an annual high.

Per the table below, note also that Dow stocks Amgen (AMGN), Chevron (CVX), Verizon Communications (VZ), and Walgreens Boots Alliance (WBA) show up on the underperformer list. When you stack that up with the Dow ETF’s modest May gain, remember the wise words of Senior V.P. of Research, Todd Salamone in this week’s Monday Morning Outlook; “think about hedging long exposure or balancing long exposure with some put exposure.”

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