The 2 Stocks Set to Thrive Regardless of Inflation
The markets gyrated in response to a hot inflation number, the start of earnings season, and better-than-expected retail sales this week, making trading more difficult than usual…
But that doesn’t mean there aren’t opportunities to find!
Any potential plays are unlikely to be in the banking sector, however…
Morgan Stanley reported a 55% decline in investment banking revenue that came in below expectations. And it wasn't any better for JPMorgan: Its earnings plummeted 28% as the bank built up reserves for bad loans.
Everyone was watching banks as an indicator for how the rest of the economy is doing. And as you can imagine, it’s also not a great sign if banks are preparing for a spike in delinquent loans.
So while the economic outlook is tough, with the threat of a looming recession during a period of sky-high inflation, there are two companies that should thrive.
Consumer staples are considered recession-resistant for a reason. People will continue to buy shampoo, toothpaste and food regardless of what’s happening in the economy.
When times are tough, two stores in particular could even see an increase in traffic: Dollar Tree (NASDAQ: DLTR) and Dollar General (NYSE: DG).
Dollar General was in the news today after Citi downgraded the stock.
Normally, stocks tend to sell off, at least short-term, after a downgrade. And shares did slide initially, but bounced back once the market opened and closed 0.82% higher. The S&P 500 closed -0.24% lower, by comparison.
The Citi analyst that downgraded DG cited the stock’s performance as one of the reasons for downgrading it. As a momentum trader, and student of market history, I love to see stocks that are outperforming the market. All else equal, those stocks tend to continue to outperform.
And DG has done just that. In the past three months alone it’s up 1.4% while the S&P 500 is down -14.8%.
Here’s what he said…
“We continue to believe DG is well positioned in the current retail landscape both near term and long term, but as one of only 2 stocks that is up on a 3, 6 and 12 month basis, expectations seem high and upside seems more limited from here,” he concluded, cutting his rating from “Buy” to “Neutral.”
The same analyst was more confident in Dollar Tree. He advised Dollar Tree offers more upside than Dollar General. Personally, given the current economic outlook and the fact that banks’ earnings are foreshadowing a recession, I’d get some exposure to both companies.
I think both companies have upside potential, especially if the Consumer Staple Sector (XLP) can break out above recent resistance near $74:
My 12-week targets for Dollar Tree and Dollar General are $180 and $265, respectively.
Simply put, I wouldn't downgrade a stock simply because it’s outperforming all the others in its industry or sector. I believe both companies are well-positioned to take advantage of the current economic rough patch.
I’ll be sitting down this morning from 10 a.m. to 11 a.m. ET with my dear friends (and trading professionals) Jeffry Turnmine, Jack Carter and Lance Ippolito to discuss these topics and more!
The major indexes closed up on Wednesday afternoon, and looked set to open lower Thursday. This speaks to a pattern I’ve noticed with the last four or five big reports…
*Stated results are atypical for given period. Past performance is not indicative of any future results. Trade at your own risk.
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