Springtime brings seasonal retailers into focus


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Michael Fowlkes 03/31/2014

The winter months are finally behind us and with the changing of the seasons, the time has come to start thinking about all the lawn and garden projects that need to be taken care of during the springtime.

This means that retailers such as Home Depot ( HD ) and Lowe's ( LOW ) are gearing up for a couple very busy months. It is very important time of year for these retailers. In both cases, these stocks earn more during the second quarter than any other, so it can make or break their total annual earnings.

Both of the companies are what are known as consumer discretionary stocks. That means for the most part, you do not have to buy the products that they sell. Of course, if you toilet breaks, you certainly will have to run into your local Home Deport or other hardware store to replace it, but as far as home improvement projects go, you really do not have to do upgrade that light fixture or plant that flowerbed in your backyard.                                                                                                              

If you want a pretty yard, sure you can spend the money it takes to keep your neighbors jealous, but you will not die one way or the other. This is why I am not the biggest fan of discretionary stocks. They are not as reliable as consumer staples, which are companies that sell products you have to have, such as toilet paper or laundry detergent. These are the goods that you are unable, or at least unwilling to go without, regardless of your current economic situation.

While I am not the biggest fan of consumer discretionary stocks, I do see strength in them at the current time. One only needs to look at a one-year chart on Consumer Discretionary Select Sector SPDR ( XLY ). It has come down a bit in recent weeks, but the overall trend is strong.

Chart courtesy of stockcharts.com

This ETF is not going to move simply because we are headed into the spring and summer months, but it does contain a lot of companies that benefit from the changing of the seasons. Home Depot and Lowe's, which we have already discussed, make up 8% of the fund. In addition, other stocks in the fund's top ten holdings include Walt Disney ( DIS ) and Priceline.com ( PCLN ), both of which gain from increased tourism in the warmer months. Also among its top ten is Nike (NKE), which sells a lot of gear for summer sports.

As I already mentioned, I am not in love with this sector, but even so I have to admit that there are some reasons to be bullish. The Conference Board recently announced its March consumer confidence reading, which is at its highest level since before the recession. Most economists agree that the economy will continue to gradually improve through the remainder of the year, so it stands to reason that consumer confidence will also improve, and keep strength in the consumer discretionary sector.

Since I see both pros and cons in the sector, I would want to make sure that any position I took would be both hedged and diversified. The perfect way to accomplish both of these things would be to set up a hedged option trade on XLY. The fund is diversified over a wide range of stocks, and using options we can successful hedge our investment just in case things take a turn for the worse.

One potential hedged trade on XLY would be the June 58/61 bull-put credit spread. In order to set up this trade, you would sell the June 61 put while buying the same number of June 58 puts for a credit of 25 cents. The trade has a target return of 9.1%, which is 39.0% on an annualized basis (for comparison purposes only). XLY is currently trading at $64.53, so the trade has built in downside protection of 5.1%.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Originally published on InvestorsObserver.com

This article appears in: Investing , Options
More Headlines for: HD , LOW , XLY , DIS , PCLN

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