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Consumer Confidence Soars for Second Straight Month: 4 Picks

Consumer confidence in the United States has increased more than expectated in September, indicating that people are finally feeling optimistic about the economy after months that saw morale hitting rock bottom. September’s jump comes after consumer confidence rose unexpectedly in August.

September’s rise in confidence level among consumers may be attributed to the decline in prices of gasoline and investors getting a clearer picture of the Fed’s plans for its future rate hikes in its fight to bring down the surging inflation. Also, a strong labor market may have prompted consumers to be more optimistic.

Given this situation, it would be ideal to invest in consumer discretionary stocks like Prestige Consumer Healthcare Inc. PBH, RCI Hospitality Holdings, Inc. RICK, Hyatt Hotels Corporation H and On Holding AG ONON, which are likely to benefit in the near term as an increasing number of Americans plan to travel and spend more during the upcoming holiday season.

Consumer Confidence Rebounding

The Conference Board said on Sep 27 that the consumer confidence index rose to 108.0 in September, beating analysts’ expectations of 10.4.5 and improving from August’s reading of 103.6. The jump in September was driven by a drop in gasoline prices and a strong labor market.

The Expectations Index, also known as the gauge of expectations, which indicates consumers' expectations for the next six months of business, income and labor market conditions, rose sharply to 80.3 in September from 75.8 in August.

Inflationary pressures somewhat waned in August and September after prices in July remained unchanged from June. People were waiting to get a clearer picture of how the Fed moves forward with its rate hikes.

On Sep 21 Fed hiked interest rates by 75 basis points, which was much expected. So, it could not dent the confidence. Instead, the Fed also said that it plans another 125-basis point hike in interest rates by the end of this year, which would take the benchmark interest rate to a midpoint of 4.40% before topping it out at 4.60% in 2023.

Optimistic Outlook

People are now more confident about the Fed’s stance in fighting surging inflation. A week after the Fed raised interest rates and predicted a rise in unemployment, the economy's growing optimism seems to have dispelled fears of a recession.

According to Lynn Franco, senior director of economic indicators at the Conference Board, customers' intentions to buy expensive things varied in August. He also said that more people now plan to purchase vehicles or large appliances in the coming months.

Although the Fed will continue with its rate hike policy, people have got the feeling that the aggressive stance will help get bring down inflation fast in the near term, which has given them this confidence. In addition, fuel prices have significantly decreased over the past month despite the continuous geopolitical unrest, which is yet another sign that the world economy and business environment are improving.

Moreover, while hiring slowed somewhat in August, it is still at a high level. The U.S. economy added 315,000 jobs to the economy. This high rate of hiring has also raised optimism among people. More jobs mean more wages, which is giving people more purchasing power.

Given this situation, consumer discretionary seems to be an ideal space to invest in. The sector is the only one to have been in the green in the past three months. The Consumer Discretionary Select Sector SPDR (XLY) has returned 0.8% in the past three months.

Our Choices

We have picked four stocks with a Zacks Rank #1 (Strong Buy) or 2 (Buy) that are poised to benefit in the near term. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Prestige Consumer Healthcare Inc. and its subsidiaries develop, manufacture, market, sell and distribute over-the-counter (“OTC”) healthcare and household cleaning products in United States, Canada, Australia and certain other international markets. PBH provides its products to mass merchandisers as well as drug, food, dollar, convenience, and club stores. Also, Prestige Consumer Healthcare operates through the e-commerce channel.

Prestige Consumer Healthcare’s expected earnings growth rate for the current year is 3.7%. The Zacks Consensus Estimate for current-year earnings has improved 0.40% over the past 60 days. PBHcarries a Zacks Rank #2.

RCI Hospitality Holdings, Inc. owns and operates adult nightclubs that offer live adult entertainment, restaurant and bar services. RICK operates adult nightclubs under the name Rick's Cabaret, Club Onyx, XTC Cabaret, Tootsie's Cabaret, Cabaret North, Jaguars and Cabaret East. RCI Hospitality also owns and operates adult Internet Websites.

RCI Hospitality’s expected earnings growth rate for the current year is 26.2%. The Zacks Consensus Estimate for current-year earnings has improved 6% over the past 60 days. RICK holds a Zacks Rank #2.

Hyatt Hotels is a leading global hospitality company engaged in the development, ownership, operation, management, franchising and licensing of a portfolio of properties, including hotels, resorts and residential and vacation ownership properties around the world. As of Mar 31, 2022, H’s portfolio included more than 1,150 properties in 71 countries across six continents.

Hyatt Hotels Corporation’s expected earnings growth rate for the current year is more than 100%. The Zacks Consensus Estimate for current-year earnings has improved more than 100% over the past 30 days. H has a Zacks Rank #2.

On Holding AG operates as a holding company. ONON, through its subsidiaries, provides footwear and sports apparel products that include ultralight and stretchable fabrics and accessories.

On Holding’s expected earnings growth rate for the current year is more than 100%. The Zacks Consensus Estimate for current-year earnings has improved more than 100% over the past 60 days. ONON has a Zacks Rank #2 (Buy).

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