Tight Belts Should Benefit Consumer Stocks

While the markets were closed on Good Friday, the Bureau of Economic Analysis released its monthly report on personal income and spending in February. The headline report was favorable, with personal income up 1.1% month over month and personal spending up 0.7%. Expectations for a rise in personal spending were baked in the cake, given the jump in gas prices during the month. That resulted in a 2.2% increase in energy goods and services during the month. I was shocked at the data when I read through the report for February -- the personal savings rate marked its second month below 3%. Moreover, consumer spending grew modestly and in line with income growth, leaving little for discretionary spending. In other words, many of us are still buying the necessities -- the staples of everyday life -- and watching our dollars and cents when it comes to more extravagant items. That benefits companies such as Procter & Gamble (PG), Colgate-Palmolive (CL), Clorox (CLX) and similar companies. It also affirms my view on what I call guilty pleasure companies -- chocolate, alcohol and tobacco stocks, such as Hershey (HSY), Mondelez International (MDLZ), Altria (MO), Philip Morris International (PMI), Brown Forman (BF.B) and Beam (BEAM), among others. Over the last few months, as gas prices climbed, I have voiced my concern over casual-dining restaurants, such as Red Robin Gourmet Burgers (RRGB), Cheesecake Factory (CAKE) and the like, given prospects for Mr. and Ms. Consumer to save where they can and eat at home rather than dine out. Shares of McCormick (MKC) have climbed nicely over the last several weeks, and the company delivered better-than-expected results yesterday. In the near term, I don't see any slowdown in demand for the company's products, particularly since it will be grillin' and chillin' season before too long. Other companies that are poised to benefit from the eat-at-home trend are Campbell Soup (CPB), Mondelez International and Pinnacle Foods (PF). Now that's quite a basket of companies to try and buy. An alternative to trying to buy each and every one of them would be to buy shares in the Consumer Staples Select Sector SPDR Fund ETF (XLP), which counts among its holdings a number of the companies mentioned above, in addition to Wal-Mart (WMT) and Costco (COST). Those latter two are prime beneficiaries for the cash-strapped consumer. Other ETFs invest in consumer staples, such as the PowerShares Dynamic Consumer Staples Sector Portfolio (PSL) and the Rydex S&P Equal Weight Consumer Staples ETF (RHS). As with stocks, however, we need to make sure an ETF has sufficient average daily trading volume, lest it be a roach motel where investors can get in but can't get out. That means casting aside PSL and RHS in favor of XLP. One drawback to ETFs is that they tend not to get as much upside as some of their individual holdings. A way to overcome that is to trade call options related to the ETF. Trading call options is not suited for individuals who are less risk tolerant, generally speaking. That said, for those investors that handle the risk and tolerate the swings associated with call options, call options can generate big returns compared with both individual stocks and ETFs. In this case, my recommendation would be for Real Money Pro subscribers to buy the June $41 XLP call option that last traded at $0.36.

Tight Belts Should Benefit Consumer Stocks

As more people watch their pennies, these stocks should do well.

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