The Dow Jones Industrial Average set a new all-time record yesterday. Perhaps driven by news that the official presidential transition is happening, investors are pushed stock prices to extremely high valuations. The S&P 500’s P/E ratio has increased by nearly 50% since the first of the year.
Although high valuations are a concern, the P/E ratio may be high because growth expectations are also high. Right now, we are willing to go along with the consensus view that growth will catch up with valuations, but we recommend remaining flexible because the economic costs of the pandemic could continue to worsen.
Some investors may also be concerned that the weekly jobless claims total was higher than expected, coming in at 778,000 when the estimate was 733,000. We don’t pay much attention to these numbers because before the pandemic, the data was considered “noisy.”
Instead, we would wait for the monthly unemployment report from the Bureau of Labor Statistics, which tends to be a little less shifty.
Still, that early unemployment claims release – remember the market is closed all-day on Thursday, and it closes early on Friday – has soured sentiment a little this morning.
Because we want to be cautious about our exposure to consumer stocks right now – especially with employment suffering – we are looking to take advantage of the dip with a bullish trade on United Parcel Service (NYSE:UPS).
A Retail Slowdown Might Not Hurt UPS
As we mentioned last week, we’re concerned about retail sales despite the fact that the holidays are approaching.
Walmart (NYSE:WMT) and Home Depot (NYSE:HD) reported earnings last week. Both companies exceeded expectations, but warned about future demand. The U.S. Census Bureau also reported month-over-month retail spending for October last Tuesday, which missed growth estimates by 40%.
Advance Real Retail and Food Service Sales — Chart Source: Federal Reserve Economic Data (FRED)
The advance retail spending numbers from last week show that the U.S. economy is still down $51.3 billion in spending that would have otherwise happened.
The pandemic created a deficit of a little over $75 billion, to put this in perspective.
But shippers like UPS are still positioned very well to take advantage of increases in online spending as businesses and consumers further shift their buying habits.
UPS and FDX are clearly experiencing a rush given how many packages they are dealing with now, and as NBC reports:
According to consulting company Accenture, 75 percent of consumers say they’ll do at least some of their holiday shopping online this year — up 65 percent from last year — and 43 percent plan to do so exclusively.
This additional shopping will put strain on UPS, but it will also put revenue in the coffers.
The UPS Advantage
When UPS reported earnings in October it beat expectations largely due to increase demand from Asia and small to medium sized businesses.
That’s one reason we aren’t concerned about the effect of a vaccine on the stock actually. If there is a vaccine sooner than expected, we don’t think investors will discount UPS as quickly because business activity would pick up, helping UPS make up for revenue lost from individual consumers shopping.
And we don’t feel that UPS has the same risks of falling demand if the pandemic is resolved more quickly than expected. An increase in economic activity should offset any issues the company might experience when consumers and businesses are willing to travel more freely.
Daily Chart of United Parcel Service (UPS) – Chart Source: TradingView
We closed our last trade in UPS before earnings on Oct. 28, which turned out to be the right call. However, since then sentiment has improved, and we think the stock has established enough support between $160-$165 to justify selling a put against the stock.
We would recommend looking farther into December for an expiration date because we think the stock will continue to perform well as we near the end of the year. We also think its worth selling puts with a strike price at the upper end of UPS’ support range.
The stock has a lot going for it this time of year, and it’s time to take advantage of that strength.
On the date of publication, John Jagerson & Wade Hansen did not hold (either directly or indirectly) any positions in the securities mentioned in this article.
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