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The shock of inflation has rocked markets, as you might expect. The S&P 500 is in a bear market as of this writing, and the Dow shed almost 600 points when markets opened this morning.
On Friday, the Bureau of Labor Statistics reported that the Consumer Price Index (CPI) showed a year-over-year increase of 8.6% in May 2022. That's the highest inflation point since 1981, as Americans contend with a surge in gas, food, and shelter costs. Even as the dollar is strengthening a bit, currently sitting at a 20-year high, commodity prices aren't coming down yet.
According to estimates compiled by Bloomberg, economists were expecting an 8.3% increase in May, so it's no surprise stocks opened lower in Friday's trading, and we're continuing to see the impact as the week begins.
Volatility is probably going to continue for a while. Like I've been saying, the Federal Reserve is backed into a corner; it has little choice regarding its interest rate policy. It has to continue raising rates, which will continue to put pressure on stocks - especially consumer discretionary stocks that sell goods or provide services that people can actually live without.
That's where I want to focus today. I always say there's always an opportunity to make money no matter where the markets are at, and today is no different.
Because we're seeing a market downturn, we're looking to buy put spreads on companies likely to take an even bigger hit as Americans tighten their belts.
Here are my two favorite picks...
Betting Against Luxury
First up, Stitch Fix Inc. (NASDAQ: SFIX), the San Francisco-based online retailer that pairs consumers with stylists who curate boxes of clothes shipped directly to your door.
In theory, I like the idea.
In practice though, the company basically has no barrier to entry from competitors, it provides a service that isn't really a necessity, and when push comes to shove, consumers who are feeling the pinch of higher energy, food, and housing prices are likely to just cancel their membership to save some money.
That's exactly what we saw in the company's recent earnings report.
On Thursday, the company reported third-quarter results of fiscal 2022 that showed revenue dropped 8% year over year to $492.9 million, and its active client count dropped by 5% (or 200,000 users) to 3.91 million.
For the quarter, the company's net loss soared compared to the same period in fiscal 2021, to a loss of $78 million, or 72 cents a share, versus $18.8 million, or 18 cents a share, during the same period in 2021.
Additionally, the company has revealed plans to shave off 15%, or roughly 330 of its salaried employees.
None of those numbers sound good, so it's no surprise the stock was down more than 19% in early Friday trading.
I don't see anything on the horizon that will magically turn around SFIX, but I also don't want to overpay for put options.
If shares of SFIX trade back up to $7.00 by June 17, 2022, I like buying the SFIX Sept. 16, 2022 $7.50/$5 put spread for $1.20 or less. Plan on exiting the SFIX Sept. 16, 2022 $7.50/$5 put spread for a 100% profit or if shares of SFIX close above $8.00.
Retail Traders Are Jumping Ship
I'm also watching Robinhood Markets Inc. (NASDAQ: HOOD), the investing platform popular with Gen Z and Millennial investors.
In 2020, when Americans were flush with COVID-19 stimulus checks and nothing to do, a lot of new investors flocked to Robinhood's platform to take a shot at being first-time investors, or even day traders. That translated into a huge revenue jump for HOOD.
In 2019, the company reported revenue of $277.53 million.
By the end of 2020, that number had jumped 245% to $958.8 million.
And by the end of 2021, revenue had jumped another 90% to $1.82 billion.
That's great top-line growth - but even with all that revenue growth, the company saw a diluted net income crater from a $106.6 million loss in 2019, to a $200.15 million loss in 2020, to a massive $3.69 billion in 2021.
Investors who made easy money on the way up off the COVID-19 bottom are now facing a rising rate environment. That's hard on stocks, especially the kind of tech and meme stocks that worked so well on the way up.
Many of those new investors have never faced a rising rate environment, and as losses mount in their accounts, they're likely to stop trading as much.
That's bad for HOOD's top line, and we're already seeing it show up in the company's numbers.
Revenue over the last 12 months has dropped to $1.59 billion.
I expect it will go lower as younger investors face inflation and have less expendable cash to invest or trade.
At this point, I like buying the HOOD Aug. 19, 2022 $7/$6 put spread for $0.40 or less. Plan on exiting the HOOD Aug. 19, 2022 $7/$6 put spread for a 100% profit or if shares of HOOD close above $8.50.
It's more important than ever for investors to find ways not only to preserve existing capital but position themselves for the best gains when markets recover. With interest rates rising and inflation staying put, banks are one area where investors are taking refuge.
But we've identified two additional key market sectors where a new flood of buying is going to create opportunities for potentially massive profits, especially in small-cap stocks that often get overlooked by the major players.
I have a strategy to narrow thousands of these stocks down to the few with the biggest potential to be the next market winners.
About the Author
Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.
Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.
Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.