Make Money on the Retail Slump with ROST

Puts on this retailer provide downside insurance

   

Disappointing November retail sales mean that chain stores will post a mediocre holiday season, and fourth-quarter GDP growth should come in well below the 2.7% third-quarter pace. If the president and Congress also agree to substantially raise taxes, a recession in 2013 becomes a lot more likely. And that is the main reason that stocks fell yesterday.

Stepping back a moment, the big picture shows that consumption is struggling to regain momentum. People are worried about jobs and their taxes, and they are spending less at the malls.  So with consumer confidence lower, hopes that retailers would enjoy a robust holiday shopping season are fading.

You never want to fully discount the ability of Americans to shop, but there just won’t be as much growth as in past years. And furthermore, there is no hot product that has everyone excited.  Everyone who really wanted a Nintendo Wii U probably got one in November. Tablet computers and cell phones will sell well, but they don’t have the “wow factor” of last year, and new entries by Google (NASDAQ:GOOG) and Amazon (NASDAQ:AMZN) are driving down prices and margins.

It’s a little sad, but the Federal Reserve sees all this and wants to do its part to be Santa Claus. The Fed’s decision this Wednesday to keep interest rates near zero and  purchase mortgage-backed securities and Treasury bonds is a money print that some economists say is putting $1.1 trillion into the U.S. economy per year. That is about the same size as the deficit. And yet what is it getting us? Not much. Certainly not a robust recovery — at least not yet, and it’s been going on a while. Europe is heading into its second year of recession, and it will be a miracle if the United States avoids one in 2013.

Now, of course we can still make money in an environment like this — and I intend to do just that. I am going to keep focusing more on puts on retailers, such as Ross Stores (NASDAQ:ROST), and also concentrate on the long side opportunities on really sold-out stocks like Apollo Group (NASDAQ:APOL).

Here are the particulars of the trade in ROST:

12 14 12 rost 300x185 Make Money on the Retail Slump with ROST
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Ross Stores was a fantastic momentum stock for most of the year but it rolled over in September and has suffered a steep decline since. The shares bounced in mid-November but ran into a wall at their 30-day average. Note: that was the level that was supportive on the way up.

Recommendation: Buy the ROST Jan. $57.50 puts for a $5.30 target. Make sure to get in soon, though — ROST fell 1.6% yesterday and as of this writing, prices are still creeping lower.

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