My No. 1 Trade For The Blockbuster Retail Report
Here in Wyoming, we’re on mountain time. That’s two hours earlier than the east coast — and I find that’s a benefit for work sometimes. Government economic data is generally released at 8:30 a.m. eastern time. But for me, it’s only 6:30 a.m., a time when the house is at its quietest.
On Tuesday, I used that time to analyze the latest data on retail sales.
What’s Behind The Blockbuster Retail Numbers
Analysts were expecting an 8% increase, a solid recovery from April’s low. The reported gain was 17.7%, which indicated consumers spent much more than expected. That was a record, topping the previous record of 6.7% in October 2001 as the economy reopened after the 9/11 terrorist attacks.
CNBC noted that the news was not all good:
“While the monthly gains set records, the economy is still making up for lost ground.
Total sales were off 6.1% from a year ago as economists still expect the biggest annualized GDP in the second quarter that the U.S. has ever seen.”
The chart below shows that sales were trending down before the shutdown and are now at levels seen in 2009, as the last recession was ending.
Source: Federal Reserve
Details in the report confirmed that gains were broad-based when compared to April. Looking back a year, building materials were the big winner among brick-and-mortar stores, with a gain of 16.4% compared to a year ago. Other categories, like department stores and electronics retailers, show double-digit declines compared to a year ago.
This is a difficult environment for investors. Gains compared to April are promising, but the depth of the decline was unprecedented. Looking forward, there will be winners and losers… and there are likely to also be surprises.
Who Wins In This Environment?
Billionaire investor Warren Buffett is famous for saying, “Only when the tide goes out do you discover who’s been swimming naked.” This is usually applied to the stock market, but the saying also applies to retailers. We are about to see which retailers are overleveraged, which ones are suffering from cash flow problems, and which ones are out of step with consumer demand.
As I studied the report, I realized one group of stocks is almost guaranteed to profit in this environment…
Credit card companies.
Sales at internet retailers are up 30.8% compared to a year ago, and online sales rely on credit cards. In stores, consumers are less likely to use cash since cash is covered with germs in the best of times — and this is not the best of times.
As I reviewed credit card companies, one stood out among the rest: American Express Company (NYSE: AXP).
American Express has more than 100 million cardholders who charge over $1.1 trillion a year. AXP makes money from annual fees, which are among the highest in the industry, starting at $150 a year. The Amex Centurion black card carries an initiation fee of $7,500 and an annual fee of $5,000. Many cardholders pay $550 a year for the platinum card.
American Express also generates revenue merchant fees. At 3% or more, this is generally more than merchants pay to accept Mastercard or Visa. The company is able to charge this high rate because American Express cardholders are generally thought to be more affluent and buy more than Visa and Mastercard customers.
American Express is being conservative when it comes to planning for the impact of the coronavirus. The company more than doubled its provisions for write-offs of delinquent accounts. As the surprise in retail spending shows, analysts might be too pessimistic. AXP could reverse those reserves in the future, and that would boost the stock.
How I’m Trading AXP
So we know that retail is faring better than the experts thought. And credit card companies are a good bet to benefit from rising spending. And while we wait to see if the company does reverse reserves, we can trade AXP for a high-probability income opportunity.
You see, most investors would be content to simply buy the stock and hope for the best. But that’s not what we’re doing over at Income Trader.
Instead, my readers are using this bullish news to generate Instant Income from the stock. And the good news is, we have a proven tool to help us confirm our idea. As it turns out, AXP also has the best chart of the credit card companies, too. It’s currently showing an Income Trader Volatility (ITV) “buy” signal.
For those who aren’t familiar with my ITV indicator, just know that this is the tool I developed to help select my regular weekly Income Trader recommendations. Of the weekly trades I’ve recommended, 90.5% have been winners going all the way back to 2013.
So while we could just buy AXP outright, we’re making a quick, easy trade on AXP to generate income now. And if all goes according to plan, we can repeat the process again and achieve similar results.