Playing the Economic Indicators

By trading shares of companies that are highly correlated with a particular piece of economic data, you can eke out extra gain potential from your short-tem portfolio.
Author:
Publish date:

BALTIMORE (Stockpickr) -- Economic indicators -- such as jobs data, consumer spending and home sales -- have a massive impact on how investors buy and sell in the stock market. Where individual investors once left economic data to the traders on Wall Street, the market crash of 2008 has made these once-cryptic numbers a must-see metric for all market participants. But more often than not, these economic updates have only a marginal effect on individual stocks.

While that's a good thing when markets are tough, it can lead to missed opportunities when the numbers impress the Street. With that in mind, are there more direct ways to profit from economic data? You bet.

By trading shares of companies that are highly correlated with a particular piece of economic data, you can eke out extra gain potential from your short-tem portfolio. Here's a look at

how to play some of the market's most popular data

.

1. Jobs Numbers

Jobs numbers are clearly one of the most impactful metrics for our economic health. Simply put, when more people are employed, their incomes get spent back into the economy, increasing economic output and "spreading the wealth." But while all companies are impacted -- at least indirectly -- by the myriad measures of employment out there, some are more prone to rally on good jobs data.

Take

Paychex

(PAYX) - Get Report

, for example. The company, which provides its business customers with payroll and HR services, is dependent on good employment numbers to provide it with incremental user revenues from the paychecks the company processes, HR services it provides, and 401(k) plans it administers.

The company has had a relatively uninspiring year to date, with shares down more than 15% since the start of 2010 -- not surprising performance given the hit that jobs numbers have taken in the last few months. But there's plenty of evidence to support the idea that the reason for the decline in share values has been more psychological than fundamentals-driven. For starters, Paychex benefits from massive switching costs on its 550,000 clients -- a factor that's kept revenues stable despite the decline in jobs. Improvement in job numbers should help spur a rally in this stock.

While competitors, such as

Automatic Data Processing

(ADP) - Get Report

, exist, Paychex is a more appealing economic data play for a couple of reasons. Because Paychex focuses on more volatile small and medium-sized businesses, the company could see a bigger jump in shares following good jobs data. Likewise, the size difference between the two payroll processors makes smaller Paychex a higher-beta (slightly more move-happy) stock.

Who Owns Paychex? Al Gore

2. Consumer Spending

Consumer spending is another of those economic metrics that touches nearly all corners of the market -- after all, when consumers are shelling out cash, it makes its way back into the economy, benefiting everyone from retailers to their suppliers. But there's a handful of companies that stand to benefit more than most from upticks in consumer spending.

Visa

(V) - Get Report

is one of them. The company's self-named payment processing network is nearly ubiquitous these days, as consumers switch from the predominantly cash payments of yesterday to electronic debit and credit transactions. Visa's tie-in to consumer spending couldn't be more clear-cut. As consumers spend more on their Visa cards, the company gets a cut of every single transaction. It's hard to have a more direct line to the state of consumer spending than that.

But with other payment networks out there, Visa's important to watch if only for its business model. Unlike banks, Visa only acts as a payment processor, eschewing all of the lending risk that caused some of the world's biggest financial institutions to close up shop in 2008. And because the company is involved in both debit and credit cards, Visa gets a cut of transactions regardless of whose money consumers use to pay for purchases.

While rival

MasterCard

(MA) - Get Report

has a similar model, Visa's brand dominance makes it the clear choice in this battle.

But if you want to take on a second position to play spending numbers,

American Express

(AXP) - Get Report

is it. While the company carries lending risk, its unusually large pool of affluent customers and push back toward charge card products (where balances are paid in full each month) are helping it recover faster than its banking peers. High merchant fees ensure that American Express sees more revenue for each dollar spent over its network than competitors do.

3. Home Sales

Wall Street continues to keep a close eye on home numbers, which is no surprise given that the bursting of the real estate bubble was the event that triggered the recession of 2008, and many economists believe that a rebound in home values is needed to re-stabilize the economy for the long term. One of the industries hardest hit by the real estate bubbles was the homebuilders. With heavily leveraged balance sheets, languishing inventory and business models predicated on ever-rising housing prices, these firms saw share prices drop like lead in the wake of the credit crunch. But those reasons also make them some of the best-positioned companies to play for a housing upside.

In this industry,

D.R. Horton

(DHI) - Get Report

could be the first company to remind investors of the profits homebuilding once yielded. While most builders saw the real estate boom of the early 2000s as an opportunity to increase leverage and raise the stakes, Horton used it to substantially decrease its debt load and inventory and trim down operating expenses.

With its new, sleeker profile, Horton has been able to stay income positive, keep paying out a dividend, and maintain significant institutional ownership. I'd recommend playing this housing stock ahead of housing data.

To see these plays in action, check out the

Economic Indicator Stock Plays Portfolio

on Stockpickr.

And to see when to play them, take a look at

TheStreet.com's Economic Events Calendar

.

-- Written by Jonas Elmerraji in Baltimore.

RELATED LINKS:

>>Charts of the Week: Denny's, Gilead

>>Invest Like Carlos Slim

>>How to Invest in Gold

Follow Stockpickr on

Twitter

and become a fan on

Facebook.

Jonas Elmerraji is the editor and portfolio manager of the

Rhino Stock Report

, a free investment advisory that returned 15% in 2008. He is a contributor to numerous financial outlets, including

Forbes

and

Investopedia

, and has been featured in

Investor's Business Daily

, in

Consumer's Digest

and on

MSNBC.com

.