6 Options for a Consumer Comeback

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One question hanging over hopes for a solid economic recovery is the return of the American consumer. It hasn’t really happened as consumers continue to pare down some of their credit card debt and draw in the reins on spending.

Since the start of 2011 the Consumer Cyclical sector has risen 4.65% compared with the 5.98% jump in the S&P 500 Index. Sure it could be worse but the consumer numbers don’t match up to the 8.91% gain in the Conglomerates sector, or the 8.93% rise in Utilities.

Still, there are some stocks and segments within the consumer cyclicals that are showing life. Perhaps the best way to play these positives is with options. They are less expensive and offer greater leverage compared with an outright stock purchase.

We asked several of our experts for options trading ideas for strategically investing in the rebirth of the consumer. They responded with an eclectic bunch, ranging from a beaten-down auto maker to high-end retailers to a tech superstar.

Please find 6 Options for a Consumer Comeback.

Apple (NASDAQ: AAPL)

By Michael Shulman, Editor, Short-Side Trader

apple logo

The fastest growing consumer products company in the world is Apple. Yes, consumer products company. According to many surveys, Apple is the second most recognized brand in the world. What is astonishing is that Apple, unlike other high tech and consumer companies, has not run out of headroom to grow at rates as fast as it has in the past five years. The iPhone, the Mac, and, if you include all the netbooks and notebooks, the iPad all have tiny market shares compared to their brand presence.

Apple’s profit margins — 41.4% last quarter — are astonishing too. Compare that with margins for Hewlett-Packard (NYSE: HPQ) at 24.5%, for Dell (NASDAQ: DELL) at 22.8%, and for Proctor & Gamble (NYSE: PG) at 50.5%. AAPL is much more a consumer products company than a tech company.

Earnings are out in a couple of weeks and they are going to blow through estimates. This is a straight up long-side trade — but I would buy September calls due to the budget crisis in Washington; with the stock at $350 or so look at strike prices at $375 or better.

Polo Ralph Lauren (NYSE: RL)

By Michael Shulman, Editor, Short-Side Trader

polo logo

RL is my favorite “New Frugal” stock — the new frugal being the state of the American consumer in 2011. This translates to a reduction in purchases but the purchases are of higher-quality items. RL is a high-quality brand behind high-quality products. It sells at outlet stores, its own stores, online and in discount stores such as Filenes Basement. The stock trades pretty much alongside the SPDR S&P Retail (NYSE: XRT), the exchange-traded fund for specialty retail.

RL is at $135 and change and could be on the verge of a breakout. Look at the October calls, and look at the $145 strike or even further out in price if you want more leverage.

Here’s a freebie — in my service, Michael Shulman’s Short Side Trader, RL is part of a classic paired trade with Target (NYSE: TGT). Part of the New Frugal is the downturn in spending at discount and quasi-discount stores like Target. TGT is also shifting more and more sales to the far-less profitable groceries sector. Look at TGT Puts closer in, August; the $46 or $47 strike prices give you a lot of leverage.

Knoll, Inc (NYSE: KNL)

By Sam Collins, Chief Technical Analyst, InvestorPlace

Knoll logo

This designer and manufacturer of workplace furnishings, textiles and fine leathers has been in a bull market since March, 2009. It is considered a leader in the furnishings group which recently broke from a long term consolidation on news that competitor Herman Miller (NASDAQ: MLHR) reported an unexpected spike in earnings. Knoll is to report earnings on Tuesday, July 19, before the opening. Several respected research firms have raised their opinion on the shares in the last week ahead of the report.

Technically the stock has found support just under its 200-day moving average at $17.88 and received a buy signal from its MACD indicator as well as moving averages as when its 20-day moving average crossed up through its 50-day moving average. The target for a trade is $25 to $27. Buy the KNL August in-the-money Call, strike price $20 for $2.25 or less with a target of $5.00.

Toyota Motors (NYSE: TM)

By Sam Collins, Chief Technical Analyst, InvestorPlace

toyoto logo

This global manufacturer of autos known for its quality product had production cut by the devastating earthquake and tsunami this spring. Its assembly lines were halted because of the interruption of the supply of parts, and original estimates were that the company would not return to full production until November or later. But this week TM announced it could fully normalize output by October. That means now is the time to buy the stock.

After a sharp fall in March from $94 to $65 the stock consolidated in April along its 200-day moving average at $80. Last week it broke from the consolidation pattern and could very quickly run to $90. Buy the TM August 20 Call, strike price $85 for $2.25 or less with a target of $5.00.

Dillard’s (NYSE: DDS)

By Chris Johnson and Jon Lewis, Editors, The Winning Edge

dillard's logo

Little Rock, Ark.-based Dillard’s usually lurks in the shadows of better-know department stores such as Macy’s (NYSE: M) and JC Penney (NYSE: JCP). But DDS is up more than 50% for the year, while M and JCP are up just 18% and 5%, respectively.

Helping DDS along was this week’s release of June same-store sales, which rose 6% compared with the consensus estimate of 3.3%. That news pushed the stock to an all-time high and paves the way for a solid second half of 2011.

The main attraction to DDS, however, is the misplaced pessimism directed toward the shares. The short-interest ratio is above 10, nearly a third of the float is sold short, and the put-call ratio is coming off a peak. What’s more just two analysts follow the stock (one “buy” and one “hold”), suggesting the shares could benefit from new coverage.

Stocks trading at all-time highs that have plenty of pessimism waiting to be unwound into buying power are prime bullish candidates in our book. Buy the DDS November 60 Call for under six bucks.

Saks Inc. (NYSE: SKS)

By Chris Johnson and Jon Lewis, Editors, The Winning Edge

Saks logo

Retail sales numbers that came out this week showed strength due to deep discounts and falling gas prices and the luxury end held up well too. SKS reported an 11.9% increase in same-store sales for June.

While the stock’s reaction to the news was muted compared to some retailers, the move was enough to push the shares above the stubborn 100-day moving average. The last time SKS closed a day above this trend line was more than two months ago. The shares have gained around 15% off their mid-June low and appear to have broken above a “lower-highs” trend in place since February.

Helping the stock may be unwinding pessimism. Short interest is dropping, but the short-interest ratio is still around 10 and a quarter of the float is sold short. Just three of 10 analysts rate the shares a “buy,” leaving room for upgrades. The put/call ratio is coming off a peak, a sign that optimism is taking hold in the option pits.

It all adds up to a bullish picture. Buy the SKS August 11 Call for around a dollar.


Article printed from InvestorPlace Media, https://investorplace.com/2011/07/6-options-consumer-aapl-dds-tm-sks-knl-rl/.

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