Consumer Confidence Up: Time to Buy 4 Retail Stocks

Volatility concerns that stemmed from a flagging Chinese economy, Euro-zone debt crisis or the U.S. Federal Reserve’s pending decision over the first rate hike may have been put to rest (at least for now) by some favorable news. After a solid GDP number was declared for the second quarter of 2015, investors’ enthusiasm was compounded by increased Consumer Confidence.

Consumer Confidence – a key determinant of the economy’s health – improved significantly in September. According to the recent Conference Board data, the Consumer Confidence Index increased to 103 in September from the August reading of 101.3, and is at its highest level since January. Industry experts believe that lower gasoline prices may have acted as a catalyst to consumer sentiment.

In spite of worries pertaining to the global financial health, analysts believe that the U.S. economy may withstand the overall gloom. Let’s delve deeper.

Favorable Economic Backdrop

The third and final data for GDP is out, and reveals that the U.S. economy is rebounding. According to the Bureau of Economic Analysis, GDP jumped 3.9% in the second quarter, faring better than the second estimate of 3.7% growth and the first estimate of a 2.3% increase. It was also significantly higher than the first quarter’s anemic growth rate of 0.6%. Moreover, the Commerce Department unveiled that new home sales grew 5.7% in August to a seasonally adjusted annual rate of 552,000 units, reaching the pinnacle since February 2008.

Retailers are looking forward to this year’s busiest shopping season as the economy is on high gear. Retailers will leave no stone unturned to make the most of the holiday season, especially in the ongoing market recovery. An uptick in the housing market and manufacturing sector, along with an improving labor market and lower gasoline prices, are favoring the economy. In August, 173,000 jobs were created, while the unemployment rate dropped to 5.1%.

Improving Consumer Spending Instills Confidence

Given an improving job picture, the gradual rise in wages and stubbornly low inflation, we expect consumer spending – which accounts for over two-thirds of the U.S. economic activity – to improve. Consumer spending increased 3.6% in the second quarter from the previous estimate of 3.1%. The Commerce Department recently unveiled that consumer spending has advanced 0.4% in August. This follows an equivalent increase in July.

With customers willing to spend more, we think that retailers could hear the cash registers jingle this holiday season. Data compiled by eMarketer suggests a 5.7% jump in holiday sales (November and December) to $885.7 billion against 3.2% growth projected earlier. Retail E-commerce holiday season sales are anticipated to increase 13.9%, and would represent approximately 9% of total sales this season (or $79.4 billion), up from 8.3% last year.

Retail Stocks to Take Center Stage

With an expected rebound in the economy, declining unemployment rate, cheap gasoline prices and improving consumer spending, the retail space is bubbling with optimism. Industry analysts predict that encouraging economic data will be reflected in an interest rate hike sometime later in the year – a step toward “normalizing monetary policy” – only after due consideration of the global economic climate.

Nevertheless, we have highlighted 4 stocks that are ready to ride on the confidence exuded by the economy.

4 Prominent Picks

We suggest investing in Foot Locker, Inc. FL, which sports a Zacks Rank #1 (Strong Buy). The stock has surged 30% year to date and has a long-term earnings growth rate of 11.5%. The New York-based company delivered an average positive earnings beat of 11.3% over the trailing four quarters. This athletic shoes and apparel retailer is expected to witness earnings growth of 18.3% in fiscal 2015 and 11.1% in fiscal 2016. The Zacks Consensus Estimate too has moved up over the past 60 days.

Lithia Motors Inc. LAD, which operates as an automotive franchisee and retailer of new and used vehicles, is another solid bet. The stock holds a Zacks Rank #2 (Buy) and has soared 21.5% year to date. The Medford, OR-based company delivered an average positive earnings surprise of 11.5% over the trailing four quarters, and has a long-term earnings growth rate of 22.9%. The company is expected to witness earnings growth of 30.7% in 2015 and 11.4% in 2016. The Zacks Consensus Estimate too has moved up over the past 90 days.

Another Zacks Rank #2 stock that investors may look forward to is Darden Restaurants, Inc. DRI. This full-service restaurant operator has advanced approximately 19.2% so far this year. An average positive earnings surprise of 13.7% over the trailing four quarters and a long-term earnings growth rate of 13.3% make this Orlando, FL player quite an attractive investment option. The company is expected to witness earnings growth of 23.1% in fiscal 2016 and 13.7% in fiscal 2017. The Zacks Consensus Estimate too has trended upward over the past 30 days.

Last but not least is ULTA Salon, Cosmetics & Fragrance, Inc. ULTA. This Zacks Rank #2 stock has advanced 27.5% year to date and has a long-term earnings growth rate of 19.6%. This Bolingbrook, IL-based provider of cosmetics, fragrance, haircare, skincare, bath and body products delivered an average positive earnings surprise of 8.1% over the trailing four quarters. It is expected to witness earnings growth of 18.8% in fiscal 2015 and 20.3% in fiscal 2016. The Zacks Consensus Estimate too has been on the rise over the past 60 days.

Bottom Line

Although the global economy has been on a roller-coaster ride, you can still enrich your portfolio returns by betting on the right kind of stocks at the right time. With improving consumer confidence as well as spending, things are definitely looking better on the retail side. Moreover, with the advent of the holiday season, the retail sector will likely gather steam. So invest in retail stocks that are sporting a Zacks Rank #1 or #2, and you could win the race.

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DARDEN RESTRNT (DRI): Free Stock Analysis Report
 
FOOT LOCKER INC (FL): Free Stock Analysis Report
 
ULTA SALON COSM (ULTA): Free Stock Analysis Report
 
LITHIA MOTORS (LAD): Free Stock Analysis Report
 
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