While economists squabble over whether or not we’re in a recession, inflation is forcing everyday Americans to make tough choices.
I can share an example from my own life.
My son needs a gluten-free diet. I thought his food was expensive in 2021 — but this year, prices are insane. Next year, they’re bound to be even higher.
But it’s non-negotiable. I have to buy those things.
So I cut back in other places. I stretch my hair appointments an extra week or two. I run outside instead of paying a monthly fee at a gym.
I’m far from the only one. Consumers all around the country are changing the way they live and spend in response to the looming recession. (I’m sure you’re doing the same. Tell us about it.)
But if you pay close attention, the market provides ways to offset these higher prices…
Porsches Parked at Walmart?
Walmart’s CFO John David Rainey recently told CNBC:
“The retailer’s reputation as a discounter is attracting more middle- and high-income shoppers. About three-quarters of Walmart’s market share gains in food came from customers with annual household incomes of $100,000 or more.”
That explains all those Porsche and Mercedes SUVs I’ve been seeing in Walmart’s parking lot.
Rainey also noted other differences in consumer behavior. Shoppers seem strapped for cash. They’re using credit more than debit, buying smaller packages, and choosing inexpensive canned tuna and beans over deli meats and beef.
Not to mention, sales of Walmart’s generic brands are growing twice as fast as they did in the first quarter.
Soon, all these changes in consumer spending will drive a rotation in stocks. And that hands traders an opportunity to make some extra money and stay ahead of rising prices.
As consumers buy less beef, meat producers will become less attractive. Stocks like Tyson Foods (TSN) could face headwinds.
Sales of smaller packages will boost cardboard makers. Graphic Packaging Holding Company (GPK) — already up 19% in 2022 — could continue to rise.
There’s a trade for every shift in human behavior. And these shifts aren’t temporary. Inflation may slow, but that doesn’t mean prices will fall. They’ll just go up less every month.
In market terms, I think this will hurt discretionary spending the most.
Signet Jewelers Limited (SIG), parent of Zales and Kay, trades with a price-to-earnings (P/E) ratio of 8. That’s less than half the market average, and I still think the stock is overvalued. The fourth quarter seems sure to disappoint.
On the other hand, consumer staples are set to benefit. TreeHouse Foods, Inc. (THS) makes generic brands for grocery stores. With a P/E ratio of about 18 based on next year’s expected earnings, the stock seems undervalued.
Of course, I could be wrong. That’s why I never trade my opinions — I follow my indicators. If they say buy, I buy.
But I’d keep a close eye on THS in the months ahead. If your indicators give the go-ahead, this could be a winning trade to close out the year.
Senior Analyst, True Options Masters
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