The Top Retail Stocks for a “Fear-Spending” Consumer VIEW IN BROWSER By Michael Salvatore, Editor, TradeSmith Daily In This Digest: - The U.S. economy runs on consumers
- They’re nervously spending like there’s no tomorrow
- One great way to profit is with these discount retailers
- The Trade Builder helps you take advantage with options
It’s hard to say where U.S. consumers are at right now… Sixty-nine percent of U.S. GDP is consumers buying goods and services. So the strength and confidence of U.S. consumers is a big deal. If they start to crack, more than two-thirds of the U.S. economy cracks with them. It’s why you constantly see headlines talking about inflation, unemployment, consumer sentiment, and retail sales. And as the last week has shown us, the U.S. consumer is blowing both hot and cold right now: - Estimates for Black Friday sales were the largest in history, with the National Retail Federation reporting $44.2 billion in spending over the four-day sale spree.
- But the University of Michigan Consumer Sentiment Index shows, consumers are as sour on the economy as they were during the 2022 inflation panic, when annual inflation clocked in at 9%. They also believe inflation will be above 4% a year from now (versus 3% today).
- And the Core Personal Consumption Expenditures Price Index, the Fed’s preferred inflation gauge, rose at an annual rate of 2.9% this month. Uncomfortably high, but at least not rising as fast as 2022.
In short, consumers are worried about the economy and inflation but not so much that they’re holding back on Black Friday. Maybe they’re spending big right now because they believe prices will climb next year. The question for us as investors: How do we use this insight to find the best opportunities the market has to offer? TradeSmith helps you turn insights like this into winning trades… We’re on track this year to spend $8 million to make sure our Research Lab creates world-class software tools for investors. And next year, our research team will probably ask for more. We’ll happily give it to them. Because they build toolkits like our premier software suite, Trade360. It helps you turn investment ideas into actionable trades with a few mouse clicks. And today, with the U.S. consumer eager to spend today out of fear of rising inflation tomorrow, we can use Trade360 to find stocks that will profit. The Screener is one of Trade360’s most powerful tools. It lets you combine traditional stock market metrics – think dividend yield, market cap, and sectors – with TradeSmith’s Business Quality Score, Health, and the Volatility Quotient. To screen for high-quality, trending consumer stocks, let’s plug in a few key filters: - Long-Team Health in the Green Zone: This is TradeSmith’s measure of market momentum based on historical volatility. When stocks are in the Green Zone, that means they’re in a healthy uptrend.
- P/E ratio above 0: This cuts out unprofitable companies, a good baseline for finding quality stocks.
- Dividend yield above 0: A dividend-paying company in the consumer cyclicals and staples sectors signals longevity. It means the company can afford to share some of its profits directly with shareholders. A strong selling point with interest rates on the down slope.
- Business Quality Score above 80: This ensures we’re only looking at stocks of the highest business quality, as determined by our proprietary ranking system.
We’ll be testing it across the S&P 500, the Dow, and the tech-filled Nasdaq 100, as well as the S&P 400 mid-cap index and the S&P 600 small-cap index. These filters cut a universe of close to 300 stocks down to 34. Just a little over one-tenth of the consumer stocks in our system meet these criteria. Below you’ll find the top five by market capitalization, each with top-notch Business Quality Scores: 
They are: - Walmart (WMT)
- TJX Companies (TJX)
- Ross Stores (ROST)
- Dollar General (DG)
- Dick’s Sporting Goods (DKS)
It’s noteworthy that across dozens of retail subgroups I selected for this screen, four out of the top five stocks are discount retailers. If you caught my Saturday interview with Andy Swan, you might think of these stocks as the bottom arm of the K-shaped economy. Where the top 10% are doing close to half of all consumer spending in luxury retail, the remaining 90% are putting their dollars to work in this more price-conscious area. The best of these stocks, judging by the Business Quality Score, is discount apparel retailer TJX Companies (TJX). It owns the T.J. Maxx, HomeGoods, and Marshalls brands among others. The cheapest stock on our shortlist is Dick’s Sporting Goods (DKS). Its price/earnings (P/E) ratio is only 15:1, less than half of TJX’s or WMT’s. And it also offers the highest dividend yield, at just over 2%. If you’re looking for quality retail exposure in a world with a cost-focused U.S. consumer, this is where you want to look. Now, let’s say you don’t just want to own these stocks, but also trade them… You can build your own options trades with this easy-to-use tool… Trade360 has a tool for taking stock ideas and turning them into options trade ideas. It’s called the Trade Builder. And it’s easy to use. First, plug in the ticker of the stock you want to trade. Then, pick your sentiment on the stock – whether you’re bullish or bearish. Finally, pick a timeframe from short-term (less than a month), intermediate-term (one to three months) or long-term (more than three months). 
Then Trade Builder picks out an options trade for you. For example, here’s what it turns up when you’re bullish Walmart for the intermediate term: 
As a quick refresher, options are financial contracts that give you the right – but not the obligation – to buy or sell a stock at a set price before a specific date. You buy call options when you think a stock will rise and put options when you expect it to fall. Think of a call option like placing a small, non-refundable deposit on a stock. You’re locking in a purchase price – known as the strike price – so that you can buy shares later at that price even if the market price is higher than the strike price. You don’t have to go through with it, but you have the right to. In this example, we’re looking to trade Walmart, which is currently trading around $114. A $325 premium gives you the right to buy 100 shares of WMT at $116 per share any time before Jan. 23. If Walmart rises above $116, the option becomes more valuable because it lets you buy the stock at a discount. At that point, you have a choice: 1) Exercise the option and buy WMT at $116 per share
2) Sell the option – which is what most traders do – because its value usually rises as the stock rises, and often much faster. Now let’s compare that with simply buying the WMT shares. If you spent that $325 on Walmart stock at $116 per share, a fractional-share brokerage would give you about 2.8 shares. If Walmart climbs to $120 by Jan. 23, you’d make about $11.20 ($4 per share x 2.8). That’s a return of roughly 3.4% – steady, predictable, and directly tied to the stock’s move. But using the same $325 on the call option gives you exposure to 100 shares, not 2.8. That’s because one option contract always represents 100 shares of stock. That’s leverage. If Walmart reaches $120 by Jan. 23, the option could return roughly 74% – far more than the stock itself. The underlying move is the same, but the option magnifies it. I share this to highlight the power of options trading as a tool to make defined-risk, high-reward bets on relatively likely outcomes. And TradeSmith’s Trade Builder can instantly find these opportunities for you. To building wealth beyond measure, 
Michael Salvatore
Editor, TradeSmith Daily Disclosure: Michael Salvatore holds shares of Walmart (WMT) at the time of this writing. | 
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