The Drop in Spending on Goods Isn’t Over, But the Fear Is Creating Oversold Opportunities

Economic data remains confusing. While the economy is slowing by several measures, we’re still seeing signs of a strong economy, such as the labor market. One trend that’s becoming more clear is that spending is declining on goods, but not necessarily on services.

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  • That’s leading to a drop in retail-related stocks. And while a slowing economy will mean a further slowdown in the sale of goods, it won’t drop to zero.

    Consumers still need to consume, if only for basics such as food and personal products. So many names taking a hit recently could be winners going forward.

    One candidate is Dollar General (DG). Shares took a hit last Thursday, as the company noted declining sales and lowered its profit outlook for the year. The big reason? The company’s customer base is more susceptible to inflation.

    Shares are now down about 10 percent over the past year, and are going for under 20 times earnings.

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  • Action to take: Investors may like shares here. At current prices, the dividend yield is close to 1.3 percent, and Dollar General has a history of increasing it over time. With inflation coming down, the current concerns over customer spending will likely wane, leading to a move higher for shares.

    For traders, a rebound from the earnings selloff is likely in the weeks ahead. The September $180 calls, last going for about $4.50, could see mid-double-digit returns on a rebound.


    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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