Investing in Retail? – Consider Protection with Stock Options

The retail sector has seen some dramatic declines over the last six months. People are losing their jobs, their houses are being foreclosed, and wages have become stagnant. All of these factors spell doom for the retail sector. During a recession, people still spend money they just spend less and often spend it at discount retailers. Some of the best discount retailers include names like Wal-Mart (WMT), Big Lots Inc. (BIG), Family Dollar (FDO), and Ross Stores (ROST). These companies should survive just fine. With that said, 90% of the retail stores will not be fine and should see dramatic declines in key indicators such as their same-store-sales and sales-per-square-foot, which will lead to declines in their share prices. I am not advocating that investors put their money to work in the retail sector, but if you must, the discount retailers would be your best bet.

Wal-Mart (WMT) operates discount retail stores under the Wal-Mart and Sam’s Club names. These stores are large in size and typically produce sales-per-square-foot numbers in the $300 range. This is quite an accomplishment given the size of their stores. People tend to shop at Wal-Mart more often when times are tough because they offer many of the same products as others stores but at significantly lower prices. Wal-Mart is able to profit very well from their reduced prices because they work directly with the suppliers enabling them to offer lower prices but still keep high profit margins. This business model has worked for years and with Wal-Mart’s stock trading right near its 52-week low, this looks like a great time to buy.

Big Lots (BIG) operates as a closeout retailer. Big Lots operates around 1,400 stores throughout the United States. Many of the items sold at their stores are brand name products that other retailers need to get rid of because they are either “out of style,” or they need to make room in their stores for the new wave of products. Consumers can find anything from food to furniture to beauty supplies at Big Lots. They negotiate directly with other retailers so they can get the best prices and offer their customers great deals. Big Lots is currently selling around $15 per share which is well of its 52-weeks high of $35. This should be a great opportunity to get this quality stock at a discounted price.

Family Dollar (FDO) operates a chain of discounted retail stores geared toward low to lower-middle income customers. The offer products such as household cleaning supplies, snacks, paper products, men’s and women’s clothing, hardware supplies, and home decor items. This retailer operates around 6,600 stores in 44 states across the country. This company’s stock is trading in the middle of its 52-week stock trading range at around $27 per share. Unlike most retailers who have been forced to cut or eliminate their dividends, this one offers its shareholders a modest 2% dividend yield which always helps.

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Lastly, Ross Stores (ROST) operates two chains of off-price retail department stores in the United States. Its stores offer branded apparel, footwear, gift items, furniture, toys, luggage, sporting goods, cookware, and jewelry among many other items. Ross Stores operates under the Ross Stores and DISCOUNT names and have about 900 combined locations nationwide. Its stock, which is currently trading around $31, is trading in the middle of its 52-week stock trading range of $21-$41.

The retail sector has been battered and bruised over the past six months. Many of these stocks are at or near their 52-week lows. With the current recession on our hands, many consumers are cutting back on their high-end retail purchases and are opting for lower end discount purchases. While the retail sector has the potential to be very volatile until this recession is over, the discount retailers could provide investors with a way to weather the storm.

If you’re considering investing in retail, but are leery, you can protect your investments with stock options. A put option, for example, can function as “stock insurance“. If the price of the stock drops, a stock with a put option is protected. Stock options also allow investors to generate income from their stock portfolios. A covered call investing strategy, for example, provides a stock investing strategy to generate income by selling call options against stocks.

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[tags] Sam’s Club, apparel, footwear, gift items, furniture, toys, luggage, sporting goods, cookware, jewelry, DISCOUNT, recession, BIG, Big Lots Inc., FDO, Family Dollar Stores Inc., ROST, Ross Stores Inc., WMT, Wal-Mart Stores Inc. [/tags]