Consumer spending makes up the vast majority of the economy. Over the past few years, consumers have been spending more on travel and vacations, and less on items like home goods.
However, even while spending less overall, increased total consumer spending means that there are still opportunities in the retail sector. One sign is the fact that major retailers continue to report strong earnings, even if current conditions mean they also have to report weak guidance.
That disconnect may be creating a buying opportunity in the short-term. Retailer Target (TGT), for instance, recently beat expectations by over 7%. While the future may show a slowdown, and increased tariff rates may mean higher prices or shortages of some goods.
While Target shares sold off after earnings, the stock has now been beaten down to about 12 times earnings, a hefty discount to the overall stock market.
Action to take: Contrarian investors may like Target here, provided they build a small stake and use further weakness to add to that position. The retailer has a strong brand, and its diverse product line should allow it to fare well under most economic conditions. Following the price drop over the past year, Target’s dividend has been pushed up to 3.7%.
For traders, shares hit a new 52-week low on the news, and sentiment is still negative. The June $105 puts, last trading for about $3.75, could see mid-double-digit returns in the coming months on further weakness in shares.
Disclosure: The author of this article has no position in the company mentioned here, but may further trade after the next 72 hours. The author receives no compensation from any company mentioned in this article.