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3 Ways to Play the Economic Data in 2011 - 6326 views
BALTIMORE (Stockpickr) -- Since the financial crisis of 2008, economic data have become a mainstream indicator of the world’s market pulse. Suddenly, Main Street investors are paying attention to metrics such as housing starts and jobless claims, and the broad market is reacting directly to new data as soon as it hits the street.
For investors, that increased interest in economic data is a trend that’s worth exploring.
To do that, it’s important to know where to focus your efforts. The truth is that some stocks are more susceptible to the market’s economic news than others. By honing in on trades that have higher data-induced volatility, traders can actually eke out gains from this market. This isn’t the first time we’ve looked at the investability of economic indicators; back in August, we took a look at three ways to play the data.
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Now, though, with a new market tone being set in 2011, it’s time to look at three updated ways to trade that economic data.
1. Jobs Numbers
The only economic indicator play that hasn’t changed in 2011 is jobs data. Jobs data continues to be one of the most hotly anticipated sets of numbers that comes out each week, and for good reason. Higher employment rates mean that the U.S. population has more income to spend on products and services. Jobs numbers are also a trailing indicator that suggests whether firms are seeing high enough utilization to justify increasing their headcounts. Clearly, then, this metric has a big impact on the stock market.
But I still think that the best way to play the trend is through Paychex (PAYX), the $11.6 billion payroll processing and HR outsourcing firm that caters primarily to small and medium-sized businesses. Since we discussed the stock back in August, the unemployment rate has dropped, and nonfarm payrolls have climbed higher; in kind, shares of Paychex have rallied more than 25%.
A big part of Paychex’s correlation with jobs numbers is the kinds of companies that it services. By focusing on smaller clients, the company’s earnings are more elastic -- and they can have bigger swings. At the same time, Paychex has spent considerable time increasing its HR and retirement offerings to existing customers, a factor that helps the company generate higher comparable profits for each additional employee hired by clients.
For investors seeking a mid-term way to play jobs numbers, Paychex is the best option in the industry.
Renaissance Technologies increased its position in Paychex by 30.3% in the most recent reporting period. According to Jake Lynch, the stock was one of the 30 worst-rated S&P 500 stocks for 2011. It's rated a B hold from TheStreet Ratings.
2. Consumer Spending
Back in August, I suggested honing in on increases in consumer spending by buying payment processors such as Visa (V). Now, though, retailers are looking like a more attractive way to play this metric.
Consumers slashed their discretionary spending in 2008, as the floor fell out of the market and uncertainty ruled. As a result, retailers found their share prices significantly bid down -- in many cases beyond reason. Since then, as increasing consumer confidence numbers drove spending, retailers have seen an outsized recovery.
But not all are created equal. To play an uptick in consumer spending numbers, it’s best to focus on upscale consumer brands.
Coach (COH) is best in breed. That’s because this $15.7 billion handbag maker was able to secure growth throughout the recession by shifting its product mix and increasing its focus abroad. Coach’s line of accessories represents attainable luxury for consumers -- sought-after status symbols with low barriers to entry. By pricing below other comparable brands, Coach was actually able to maintain double-digit profit margins throughout the recession.
While the company is looking toward burgeoning middle class populations to drive growth in the future, the U.S. still provides a disproportionate chunk of revenues.
Coach shows up in the portfolio of Richard Aster at Meridian Fund. It was one of the 10 best S&P stocks of the past decade, and Sterne Agee named it one of the 12 top consumer stocks for 2011. TheStreet Ratings has a B buy rating on the stock.
3. Home Sales
Despite the increased popularity of equity investing in the last two decades, it’s common knowledge that most retail investors’ biggest investments are their houses. And because changes in the value of real estate can impact fund flows from Main Street, the real estate market is invariably tied to stocks.
In the past, homebuilders have been a direct (if volatile) way to play housing data. But for 2011, real estate investment trusts (REITs) are looking like a less direct, yet more attractive way to trade this housing indicators.
Because REITs are in the business of owning real estate, a large part of their value comes from the state of the real estate market. But that’s only partially important to investors in these trusts. Because of attractive triple-net lease agreements and long-term contracts, REITs have relatively stable profitability and dividend coverage. And today, many are well-capitalized options for income investors.
One of the best REIT routes is the Vanguard REIT ETF (VNQ), a fund that owns a diversified basket of 99 trusts. The most attractive attribute of VNQ is the ETF’s cost to investors. With an expense ratio of just 0.13%, this fund weighs in as one of the cheapest ways to get exposure to commercial and residential real estate. The fund’s current dividend yield rings in at 3.42%.
TheStreet Ratings has a C+ hold rating on VNQ.
To see these plays in action, check out the 2011 Economic Indicator Stock Plays Portfolio on Stockpickr.
And to see when to play them, take a look at TheStreet.com’s Economic Events Calendar.
-- Written by Jonas Elmerraji in Baltimore.
At the time of publication, author had no positions in stocks mentioned.
Jonas Elmerraji, based out of Baltimore, is the editor and portfolio manager of the Rhino Stock Report, a free investment advisory that returned 15% in 2008. He is a contributor to numerous financial outlets, including Forbes and Investopedia, and has been featured in Investor's Business Daily, in Consumer's Digest and on MSNBC.com.