The U.S. economy bumped along in the first quarter of 2015 and almost came to a screeching halt. The real gross domestic product (GDP) barely expanded 0.2%, falling shy of analysts’ expectation of 1% growth. The economy fared better than the first quarter of 2014, when GDP faltered 2.1%. But the glory of 2.2%, 5% and 4.6% GDP growth portrayed in the fourth, third and second quarters of 2014, respectively, was clearly missing.
The consequences were palpable in the retail sector which swings alongside the mood of the economy. Yet, who doesn’t like a positive return from one's portfolio? And nothing is more exciting than returns in an unfavorable economy when market behavior is unpredictable.
But is it enough to look for a favorably ranked stock while picking a market winner? If a stock is powered by the optimism of an earnings beat, chances of one’s portfolio giving higher returns are much higher. Although investors exercise extra caution while choosing their portfolio, surety of return is not guaranteed every time.
So a lowdown on the economy in the January to March quarter is a prerequisite before short listing the likely retail winners.
Retail on Thin Ice?
Market pundits believe that an unfavorable weather condition, weakening of foreign currencies, subdued business investment, labor dispute at West Coast ports and lower oil prices that dented the energy sector came in the way of economic expansion in the first quarter. A strong dollar led to attractive imports but dampened exports that plunged 7.2%.
Consequently, consumer spending, which accounts for over two-thirds of the U.S. economic activity, also decelerated to a rate of 1.9% in the quarter from 4.4% in fourth-quarter 2014. Analysts believe that all these in turn may have played a vital role over the timing of the Federal Reserve’s interest rates rise, which has most probably been put aside for the time being.
Shrugging off these disappointing figures, a panel of economists still believes that the underlying fundamentals are strong enough to drive the economy and withstand the overseas turmoil. They expect the economy to grow at a pace of about 3% in 2015. Gradual recovery in the housing market, a strengthening manufacturing sector, an improving labor market and lower gasoline prices are favoring the economy and boosting consumers’ purchasing power. Moreover, as temporary factors, such as harsh weather and port unrest take a back seat, the economy will be bounce back, although it may have to endure a stronger dollar for some time.
Confidence was also instilled by the 0.4% increase in consumer spending during March, following a modest jump of 0.2% in February from a decline of 0.3% in January. Moreover, job prospects should encourage spending. A recent data shows that the number of people claiming unemployment benefits dropped 34,000 for the week ended April 25, to a seasonally adjusted 262,000 versus 290,000 expected, and the unemployment rate is lingering at around 5.5%, its lowest level in six years. Consumer confidence – a key determinant of financial health – is also improving significantly, making the future look brighter.
In fact, the recent data released by the University of Michigan and Thomson Reuters showed that the consumer sentiment index jumped to 95.9 in April from the March reading of 93.0.
The year ahead looks promising for retailers as stock prices gain momentum, the employment picture improves and consumer confidence moves north. This would help the retail stocks take center stage. Given its wide spectrum, the Retail/Wholesale sector remains a lucrative investment opportunity, and identifying the future winners from the sector would be a prudent idea.
The Future Winners among the Crowd
Picking the best stocks from the Retail/Wholesale space for one’s portfolio is a fairly simple task. One way to narrow down the list of choices during this earnings season is by looking at stocks that have the combination of a favorable Zacks Rank – Zacks Rank #1 (Strong Buy), #2 (Buy) or #3 (Hold) – and a positive Zacks Earnings ESP.
Earnings ESP is our proprietary methodology for identifying stocks that have the best chance to surprise with their next earnings announcement. It shows the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate. Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%.
For investors seeking to apply this strategy to their portfolio, we have highlighted 3 Retail/Wholesale stocks that may stand out this earnings season:
3 Prominent Picks
The Home Depot , Inc. (NYSE:HD) is a Zacks Rank #3 stock with an Earnings ESP of +2.61%. The current Zacks Consensus Estimate for the first quarter of fiscal 2015 is pegged at $1.15 per share, reflecting an increase of about 14.6% year over year. This Atlanta, GA based home improvement retailer registered an average earnings beat of 5.4% over the trailing four quarters. The company is slated to report on May 19, and has a long-term earnings growth rate of 14.1%.
Lowe's Companies Inc. (NYSE:LOW) is also a Zacks Rank #3 stock with an Earnings ESP of +2.70%. The current Zacks Consensus Estimate for first-quarter fiscal 2015 is 74 cents a share, which indicates an increase of 27.7% year over year. This Mooresville, NC based home improvement retailer registered an average earnings beat of 0.8% over the trailing four quarters, and has a long-term earnings growth rate of 15.9%. The company’s earnings are expected for release on May 20.
Jack in the Box Inc. (NASDAQ:JACK) is a Zacks Rank #3 stock having an Earnings ESP of +1.52%. The current Zacks Consensus Estimate for the second quarter of fiscal 2015 is 66 cents a share, which indicates an increase of 30% year over year. This San Diego, CA based quick-service restaurant operator registered an average earnings beat of 5.2% over the trailing four quarters, and has a long-term earnings growth rate of 16.2%. The company’s earnings are expected to be released on May 13.
Bottom Line
Who doesn’t want a portfolio of stocks that have the potential to outperform and beat earnings estimate?