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We’re selling the rest of a specialty retailer and putting more cash to work in a beer stock

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We’re exiting our position in American Eagle Outfitters (AEO), selling 2,000 shares at roughly $13.21 each. At the same time, we’re buying 50 shares of Constellation Brands (STZ) at roughly $234.45 each. Following Thursday’s trades, the portfolio will no longer hold a position in AEO, and it will own 240 shares of STZ, increasing its weighting in the portfolio to 1.98% from 1.58%. We’re selling the rest of our position in American Eagle Outfitters due to the concerns we have about this specialty retailer. As we talked about Wednesday, when we cut our position in half , we do not think American Eagle Outfitters has the right type of inventory for this change in consumer spending habits. Aerie, one of AEO’s brands, has some of the highest exposure to loungeware for a stay-at-home economy, in a time when people are going out more often to go to the office or travel in these later stages of the Covid pandemic. The company also made a big bet on swimwear this spring, and April turned out to be one of the coldest and wettest in ages. In addition, the freight and transportation headwinds that impacted the industry for a few quarters now do not sound like they have abated. In short, we do not want to stick around next week when the company reports earnings to hear all about how they had the wrong inventory this quarter and how inflationary pressures are eating into margins. That’s why we are willing to take the 50% loss we have on the rest of our position and move on from what has been a major disappointment. With this sale, we’re happy to have this extra cash because we don’t need to remind you how difficult the market is right now. But we don’t want to take too much cash out right now because the market is back in deep oversold territory. After Wednesday’s major selloff, the S & P Oscillator moved to minus 7.13%. That’s not as oversold as it was last Thursday, when the Oscillator minus 8.25%. Of course, the market can always get more oversold from here. But since we want to continue high grading the portfolio, we are taking half of the cash raised from the AEO sale to fund a purchase of Constellation Brands, the premium beer, wine, and spirits company whose sales tend to be resilient even in an economic slowdown. Constellation also does virtually zero business in China — both from a revenue and supply chain perspective — meaning the company is immune to the Covid lockdown fears that continue to weigh on the mind of investors. At a time when many are worried that consumer spending habits changed drastically in April based on the comments from Walmart (WMT) and Target , we do not believe Constellation has seen that at all, with beer, wine, and spirits sales immune to this. At a recent virtual roundtable event, management said that March and April depletions, the number of cases that are sold to retailers by a distributor, were “consistent with annual guidance,” meaning the company’s expected 11% earnings growth for this year is on track. (Jim Cramer’s Charitable Trust is long AEO, STZ and WMT. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

Constellation Brands’ Corona Light is displayed for sale at a grocery store in New York.
Scott Eells | Bloomberg| Getty Images