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Why a "Buy the Rumor, Sell the News" Approach Is So Profitable Right Now

Earlier this week, I told you that my Best in Breed (BIB) methodology revealed the August-September timeframe is the perfect time to buy into the retail and consumer discretionary sectors.

The reasoning underlying these sectors' strength is as old as the market itself.

You see, investors buy (the rumor) heading into the traditional back-to-school/Halloween/holiday shopping seasons and take profits (sell the news) when the sales results start coming in around the beginning of December.

Today, I want to give you the names of the strongest stocks in these very strong sectors...

This Consumer Stock Is Hitting New Highs

Let's start with Darden Restaurants Inc. (NYSE: DRI), a component of the Consumer Discretionary Select Sector SPDR ETF (NYSEArca: XLY). Orlando, Fl.--based Darden owns and operates several well-known restaurant brands, including Olive Garden, LongHorn Steakhouse, and Capital Grille.

The stock has been a solid performer, gaining 20% in 2018, more than double the return of the S&P 500.

In fact, Darden hit an all-time high Thursday morning.

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The current rally has seen the shares gain 36% in just four months, thanks in part to strong support from the 50-day moving average. Maybe the fact that Olive Garden sold out of its Never Ending Pasta Passes helped as well.

DRI Graph

 

Despite the stock's strength, short sellers remain unwisely resolute. In fact, Darden's short-interest ratio has spiked in the past two months from below 3 to just under 7. That tells me there is plenty of short-covering fuel that should keep the rally intact.

What's more, only a third of the covering analysts consider Darden a "Buy," which is hard to understand for a stock hitting new highs. Look for some upgrades to come Darden's way should the current rally continue.

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Darden reports earnings on Sept. 20. Last quarter, the stock soared 15% the day following earnings, thanks to impressive same-store sales results.

Though I'm not predicting another spike like that this quarter, I expect the rally to continue. To leverage the expected move, the $115 call expiring on Jan. 18, 2019, looks like a tasty option (pun definitely intended).

Despite a 5% Drop, We're Still Bullish on This Retail Stock

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Turning to the retail sector, here's a stock that I just recommended in my investment research service - Best Buy Co. Inc. (NYSE: BBY).

It's one of several retail stocks I've been recommending for subscribers of late based on my Best in Breed system telling me that retail is the place to be right now.

You might think it odd that I'm bullish on a stock that dropped 5% after its earnings report on Tuesday.

Despite reporting strong earnings and same-store sales in the second quarter, a modest outlook for the current quarter put traders in a bearish mood on Best Buy. But company executives explained the soft outlook was due to planned increased investments in its supply chain and transportation.

Furthermore, the company raised its profit and revenue targets for the full year.

Analyst reaction to the news was mixed. While there weren't any upgrades or downgrades, there were a few target price increases. Analysts as a whole are less than enthusiastic toward Best Buy, with just 28% giving the stock a "Buy" rating. Look for some upgrades to follow up on the raised targets.

Best Buy is up 13% for the year compared to the SPX's 9%. But that's after the earnings decline. Just last week, Best Buy hit an all-time high and was up more than 20% for the year. What's encouraging is that the earnings drop appears to be a one-off move.

The shares have stabilized at their ascending 50-day moving average and look poised to bounce higher as we head into a seasonally strong period for the retailer. In fact, since 2000, the stock has returned 18% from Labor Day through Thanksgiving, posting positive results in 14 of the 18 years.

BBY GRAPH

Short interest is also aligned in Best Buy's favor, as the short-interest ratio now stands at a robust 8.4, thanks to a steady increase since May. I'm looking at a move to $80 as a trigger to set off a short-squeeze rally that should take the stock north of the $90 level.

With technical support holding after earnings, a bright fundamental picture that extends beyond the current quarter, bullish seasonality, heavy short interest ready to be squeezed, and plenty of room for analyst upgrades, the next few months look bright for Best Buy.

But that's something my subscribers already know.

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