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Michael Fowlkes' Analyst Insights  
 


Michael Fowlkes

InvestorsObserver
Options and ETF Analyst Writer
Michael Fowlkes
Author Bio 

 

October 1, 2012 - A Good Defense is the Best Offense

The summer has come to an end. The days are getting shorter, and the leaves are starting to turn. This can only mean one thing - it's football season! Football has become America's favorite past time, and whether you prefer college or professional football, football season is a great excuse to get together with your friends and enjoy an afternoon of food and fun.

Last year a survey reported that nearly 65% of all U.S. adults watch football on the weekends. According to the study, 73% of men and 55% of women in the country say they currently watch football games, a figure that is not lost on companies that are in a position to take advantage of the games' popularity.

Football season is a great opportunity for companies to market their products, and nothing proves this more than the insane rates that advertisers pay on Super Bowl Sunday. NBC has already announced that it has sold out its commercial airtime for the next Super Bowl in February, with the average cost for a 30 second slot running at $3.5 million. That is not even including the amount of time and money that companies put into creating the commercials.

Consumer staples such as Coca-Cola (KO) and Procter & Gamble (PG) will be very aggressive in their advertising. They understand how important the football audience has become.

But even beyond the advertising potential, a great deal of consumer staple companies benefit from football season, since all those parties need food and drinks -- companies like Constellation Brands (STZ), which makes beer people drink during the games, or grocers like Kroger (KR) that sell all sorts of products consumed during football games.

Consumer staples have been rock solid during the recent recession and should continue to perform well with the help of the millions of football fans buying their products each week for the next few months.

Football season is a time for these companies to aggressively go on the offensive; but for investors, the current market may be a time to be a bit more defensive. If you want to put some money to work with the consumer staples, but want to take a slightly more defensive approach, you may want to consider the Consumer Staples ETF (XLP).

Sometimes the best offense is a good defense, and that is exactly what you can accomplish with an investment in XLP. You are able to play the consumer staples, but build in some defense by the nature of its diversity. Every investor knows the best way to defend your portfolio from any major downswing is by diversifying over a wide range of companies. Not every investor has the capital they need to accomplish this; so using ETFs such as XLP allows you to diversify through one single transaction.

XLP is up 12.5% so far this year. A nice hedged trade on XLP would be the December 35/32 bull put credit spread. In this trade, you would sell the December 35 put while buying the same number of December 32 puts for a credit of 30 cents. This trade has a target return of 11.1%, which is 49% on an annualized basis (for comparison purposes only). With XLP currently trading at $35.83, this trade has 2.4% downside protection.

 



 

 

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