5 Top Picks On Three Key Takeaways From Q2 U.S. GDP

On Jul 26, the Bureau of Economic Analysis released an advance estimate of U.S. GDP for the second quarter of 2019. The growth rate of U.S. GDP declined to 2.1% from 3.1% reported in the first quarter, marking the slowest growth since the first quarter of 2017. However, the figure was better than the consensus estimate of 1.8% despite facing tariff war and a slowing global economy.

A closer look at the second-quarter GDP will help us to make three important inferences, which are expected to give guidance on the economy and stock market in the near term.

Consumer Spending Jumps – Recessionary Fears Overblown

The most important positive feature of second-quarter GDP is that personal consumption expenditure jumped 4.3%, the highest since the fourth quarter of 2017, after growing a mere 1.1% in the previous quarter. Consumer spending grew on new cars and trucks, food and drinks, and clothing.

Moreover, government consumption expenditures and gross investment increased 5%, reflecting its fastest pace since the second quarter of 2009. Hike in federal outlay after the end of a record 35-day partial government shutdown, which significantly affected the first quarter, has given a major boost to the second quarter.

Notably, personal consumption expenditure constitutes nearly 70% of the U.S. GDP. A robust labor market, which added 172,000 jobs per month on average in the first half of 2019, a record-low unemployment rate of 3.7%, and gradual increase in wage rate are likely to sustain U.S. consumer expenditure, thereby eliminating the chance of a recession any time soon.

Business Spending Nosedives – High Probability of Rate Cut

In second-quarter 2019, gross private domestic investment plunged 5.5%, the largest decline since the fourth quarter of 2015. Spending on structures (like office buildings, manufacturing plants and drilling rigs) plummeted 10.6%. This resulted in nearly 1% decline in second-quarter GDP.

Moreover, fixed investment dropped 0.8%, reflecting its biggest decline in three and a half years. Expenditure on residential housing fell 1.5%, marking slowdown in homebuilding industry and exports tumbled 5.2% due to global slowdown and a strong dollar. Finally, decline in inventories led to a nearly 0.9% decline in GDP. Notably, business spending constitutes more than 12% of U.S. GDP.

In this respect, a rate cut by the Fed, in its upcoming FOMC meeting scheduled Jul 30-31, is highly likely. In June, Fed chair Jerome Powell expressed his concerned about declining business expenditure and slowing global growth. A drop in the benchmark lending rate, which is currently at 2.25-2.5%, will provide cheaper funds to businesses for investment.

Further, lower interest rate will also reduce the price of U.S. dollar, raising the competitiveness of U.S. exports. As of Jul 28, per the CME FedWatch, 81% respondents expect a rate cut of 25 basis points, while 19% expects half a percentage cut.

Economy to Support Earnings in Near Term

With the advent of July 2019, the U.S. economy officially entered into the longest stretch of expansion at least since 1854. Although the pace of economic growth has reduced, it still can deliver a lot of good things.

A growth rate of more than 2% is always a healthy number. Moreover, the core PCE price index –- Fed’s favorite gauge of measuring inflation – grew 1.8% in the second quarter from 1.1% in the previous quarter. It is still below the central bank’s 2% target level.

Moreover, recently released economic data such as durable goods orders, industrial production, manufacturing and service PMI indicate that the fundamentals of the economy are not as bad as projected by some economists. Likewise, expectation for second-quarter earnings has been gradually increased in July. Solid foothold of the U.S. economy is likely to provide higher profitability for U.S. corporates.

Our Top Picks

At this stage, it will be prudent to invest in stocks with strong growth potential and a favorable Zacks Rank. We have narrowed down our search to five such stocks, each with either a Zacks Rank #1 (Strong Buy) or 2 (Buy), Growth Score of A and a positive Earnings ESP. These five stocks popped in the past three months. You can see the complete list of today’s Zacks #1 Rank stocks here.

Our research shows that for stocks with the combination of a Zacks Rank #3 or better and a positive Earnings ESP, the chance of an earnings beat is as high as 70%. These stocks are expected to climb after earnings release irrespective of already solid gains year to date.

The chart below shows price performance of our five picks in the past three months.

Repligen Corp. (NASDAQ:RGEN) develops, manufactures and sells products used to enhance the interconnected phases of the biological drug manufacturing process in North America, Europe, APAC and internationally. The stock sports a Zacks Rank #1.

Repligen has an Earnings ESP of +20.97% for the current quarter. The company has an expected earnings growth rate of 56.3% and 31.5% for the current quarter and year, respectively. The Zacks Consensus Estimate for the current quarter and year improved 13.6% and 3.2%, respectively, over the last 30 days.

The company delivered positive earnings surprise in three of the last four quarters with an average beat of 1.9%. The stock has surged 37.3% in the past three months. Repligen is expected to release earnings results on Aug 1, before the opening bell.

Tandem Diabetes Care Inc. (NASDAQ:TNDM) designs, develops and commercializes products for people with insulin-dependent diabetes. Its products include t:slim Insulin Delivery System. The stock sports a Zacks Rank #1.

Tandem Diabetes Care has an Earnings ESP of +35.58% for the current quarter. The company has an expected earnings growth rate of 32.4% and 68.2% for the current quarter and year, respectively. The Zacks Consensus Estimate for the current quarter improved 4.2% over the last 30 days.

The company delivered positive earnings surprise in the last four quarters with an average beat of 39.9%. The stock has gained 2.6% in the past three months. Tandem Diabetes Care is expected to release earnings results on Aug 1, after the closing bell.

Telephone and Data Systems Inc. (NYSE:TDS) is a telecom company that provides wireless, cable and wireline broadband, TV, voice, and hosted and managed services in the United States. It operates through three segments: U.S. Cellular, Wireline, and Cable. The stock sports a Zacks Rank #1.

Telephone and Data Systems has an Earnings ESP of +12.50% for the current quarter. The company has an expected earnings growth rate of 10.3% and 9% for the current quarter and year, respectively. The Zacks Consensus Estimate for the current quarter and year improved 3.2% and 0.8%, respectively, over the last 30 days.

The company delivered positive earnings surprise in three of the last four quarters with an average beat of 28.1%. The stock has gained 4.9% in the past three months. Telephone and Data Systems is expected to release earnings results on Aug 2, before the opening bell.

Sunoco LP (NYSE:SUN) engages in the distribution and retailing of motor fuels in the United States. It operates through two segments, Fuel Distribution and Marketing, and All Other. The stock carries a Zacks Rank #2.

Sunoco has an Earnings ESP of +14.64% for the current quarter. The company has an expected earnings growth rate of 108.8% for the current year. The Zacks Consensus Estimate for the current quarter increased 15.6% over the last 30 days.

The company delivered positive earnings surprise in three of the last four quarters with an average beat of 29.7%. The stock has advanced 9.4% in the past three months. Sunoco is expected to release earnings results on Aug 14, after the closing bell.

Rent-A-Center Inc. (NASDAQ:RCII) leases household durable goods to customers on a rent-to-own basis. The company operates through four segments: Core U.S., Acceptance Now, Mexico, and Franchising. The stock has a Zacks Rank #2.

Rent-A-Center has an Earnings ESP of +3.88% for the current quarter. The company has an expected earnings growth rate of 19.2% and 100% for the current quarter and year, respectively. It delivered positive earnings surprise in the last four quarters with an average beat of 73.9%. The stock has advanced 6.4% in the past three months. Rent-A-Center is expected to release earnings results on Aug 7, after the closing bell.

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