Playing a Potential Downturn With 5 Stocks

Includes: AZO, MCD, RP, SDS, VXX
by: Stock Traders Daily

In a matter of just a few weeks, investor complacency has been replaced with worry, fear, and anxiety – and for good reason. Much has been said and written about how spiking crude oil prices are hurting people at the pump. The more consumers pay at the pump, the less they have to buy other goods and services. This is true, of course. But what isn’t talked about as much on Main Street is the negative impact the rising crude prices will have on corporate America. It will be costlier to make products, run facilities, and transport goods. This will cut into margins and ultimately into earnings. While it is easy to see and feel the rise in crude prices when filling up the tank, the bigger economic problem is lurking on companies’ income statements, and that won’t fully be understood until first quarter earnings are released.

Unfortunately, there are other concerns and issues that have been masked by the stock market’s unwavering run. Speaking of that run, it has been said that over 50% of hedge fund managers believe that the stock market’s gains have largely been fueled by the investments generated from "QE2." What happens when that goes away in June? The housing crisis is still just that – a crisis. Many countries in Europe are still in financial distress. And, here at home, municipalities across the land are facing dire budgetary issues, forcing local governments to cut jobs, or cut back on employees’ hours. This, clearly, is not a positive for the labor market, nor is it for the fragile economic recovery. While few will are predicting another recession at this point, many analysts do feel that a pull-back – perhaps a potent one – may be on the horizon. With that in mind, I wanted to point out a few stock ideas that may work in a difficult economic climate.

Get in "The Zone"

During difficult economic times, one of the last purchases a consumer wants to make is one that comes attached with a five or six year payment commitment. Car sales are hit particularly hard during recessions. One stock that is essentially a play on a challenging auto environment is AutoZone (NYSE:AZO). As many people are aware, the company is a retailer of auto replacement parts and accessories. Since the economic downturn struck, many people have been demanding more and more out of their current vehicles. This, logically, means that more replacement parts and repairs will be needed to get extra mileage out of those cars. This trend has been evident in its financial results and its stock performance. For instance, from early November 2007 through early March 2009 (the collapse of the stock market), shares of AZO were actually up 26% compared to the staggering 55% drop for the S&P 500. With the recent volatility, the stock has cooled off a bit, although it has exhibited good relative strength. For a much more thorough look at its technicals, please access our trading report by clicking on its ticker above.

Real Estate a Real Problem

In the paragraph above, we laid out a stock that fares well when times are tough for auto makers. Similarly, there is a stock that is essentially a play on the disaster that is the housing market. RealPage (NASDAQ:RP) is not be a name that many investors and traders are familiar with, despite the fact that the stock is up ~120% versus its August 12 IPO price of $11. For those who may not be familiar with the company, RP is a Software-as-a-Service provider for the multi-family rental housing industry. Its software, which caters to landlords and property owners, helps them to market, price, screen, and lease their properties. Over the past couple of years, the rental housing market has seen an influx of activity as single family homes, condos, and townhouses have floundered. With many analysts expecting more pain in the housing industry in the year(s) ahead, RP looks like a safe bet for investors. Furthermore, the stock’s recent slide has put it at a key support level, which sets up an opportune entry level. To learn more about RP’s specific entry/exit levels, please view our trading report by clicking on its ticker below.

Trade-Down Effect on the Menu

With consumers feeling the pinch at the pump, their appetite for more expensive dining options is likely to wane. However, while people may have a little less money in their wallets, they haven’t been given more time in the day. This combination of lower discretionary income and perpetual time crunches is a good recipe for the world’s largest fast food chain – McDonalds (NYSE:MCD). The other inflationary pressure that has garnered many headlines is rising food costs. Increasing dairy, wheat, and cattle costs could put a squeeze on its margins, but it also could work out in its favor. The restaurants that stand to take the brunt of food inflation are those that either don’t have brand loyalty or don’t have pricing power. As the most recognizable name in the space, and with its everyday dollar menu, MCD has both. This, too, is evidenced by its impressive relative strength during the recession. From November 2007 through the end of March 2009, shares of MCD only lost 7%. Since then, the stock has gained 33%.

A Pair of ETFs to Consider

An alternative strategy to picking single stocks is to consider ETFs that offer some protection versus downturns in the market and/or increasing volatility. The good news for traders and investors is, with the prolonged run and accompanying complacency, it has become quite cheap to buy protection. For instance, the ProShares UltraShort S&P 500 (NYSEARCA:SDS) is trading near its lowest levels since its inception in July 2006.

However, if taking a short position isn’t your "cup of tea", the iPath S&P 500 VIX Short-Term Futures ETF (NYSEARCA:VXX) offers another option. It is a play on an expected increase in volatility, and tends to move higher when stocks are under pressure. Like SDS, this ETF is also trading at historically low prices. In both cases, though, there is primary resistance levels overhead that traders should be aware of, so we urge our readers to take a look at our trading reports before entering a position.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Our Trading Reports on Stocks Mentioned in This Article: