In a Rising or Falling Economy, Don’t Bet Against Defensive Consumer Plays

Consumer spending makes up the bulk of economic spending – over two-thirds, by most estimates. That means that any change in where and how consumers are spending can lead to a shift of billions of dollars.

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  • As retailers report their quarterly earnings, some are seeing consumers head their way amid rising economic uncertainty. Others aren’t faring as well. But a few players could be a standout play at current prices, given the role consumers play in the economy.

    For instance, Home Depot (HD), the largest home improvement retail chain, is near a 52-week low. But it’s reporting solid earnings right now.

    More importantly, it’s benefitting from rising home prices as more work is done to improve home values – but it could also fare well during a housing slump as activity slows and consumers spend more time at home.

    The recent market selloff has now unwound all of last year’s gains in the retailer, which now trades for less than 20 times forward earnings, a reasonable price for such a strong brand.

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  • Action to take: Investors may like shares here. The stock is nearly 30 percent off its all-time highs, a fairly rare occurrence for the retailer. And it’s a dividend growth play now yielding about 2.6 percent with room for future increases down the line.

    For traders, the September $350 calls, last going for about $5.00, could see a high double-digit gain return in the coming months should shares continue to rally off their recent lows. That would still leave shares less than halfway recovered between their current price and prior high.

     

    Disclosure: The author of this article has no position in the company mentioned here, but may trade after the next 72 hours. The author receives no compensation from any of the companies mentioned in this article.

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