Consumers in the U.S. and China seem to be paying little heed to the spate of poor economic data released recently. According to a fresh report from Nielsen, consumer confidence in the U.S. jumped in the third quarter to the highest level ever recorded by the research firm since it started its survey a decade ago.
Nielsen’s data also shows that consumers in China remain undeterred by the country’s debt problem and manufacturing weaknesses. Confidence among consumers remained unchanged compared to the second quarter in the world’s second largest economy.
These indications mean it may be a good time to add consumer discretionary stocks with strong growth prospects from both the U.S. and China to your portfolio.
U.S. Consumer Confidence Logs Record Quarterly Jump
According to data from Nielsen, consumer confidence in the U.S. increased by a record 18% during the third quarter. This surge in positive sentiment came despite the fact that consumer spending recorded its smallest increase since January during the month of September. The decline in expenditure was primarily due to a slowdown in spending on nondurable goods.
Personal consumption expenditure increased 0.1% in September, less than the consensus estimate of an increase of 0.2%. Personal consumption expenditure rose 0.4% in August. Additionally, personal income rose 0.1% in September, registering its slimmest gain since March.
Job Additions, Oil Slump Boost Purchasing Power
However, the same report shows that the consumer is spending more compared to earlier quarters. During the last quarter, consumer expenditure increased 3.2%, beating the average rate recorded over the last five years.
Additionally, two other factors are working in favor of consumption. Despite the fact that wage growth remains sluggish, job additions have remained steady this year. The economy has added 198,000 jobs every month, exceeding the pace logged in seven of the last 10 years up to 2014.
Further, the cost of gasoline has been falling over the last two months. As of date, the average price of regular gasoline has slumped to $2.19 per gallon, per data from the American Automobile Association. This is significantly lower than last year’s average price of $2.98 per gallon.
As a result, disposable income adjusted for inflation increased 0.2% in September. The figure also recorded year-over-year growth of 3.4%, the highest since Feb 2015. This means the consumer’s purchasing power has received a considerable boost, improving the prospects of consumer discretionary items.
China’s Rate Hike Improves Sentiment
The People’s Bank of China’s (PBOC) decision to reduce rates has alleviated concerns of investors and consumers in the U.S. as well as China. U.S. investors have been ridden of a nagging downward drag. On the other hand, investors in China believe that their government will continue to take steps to boost a flagging economy. On Oct 23, the PBOC cut key rates for the sixth time for the year.
Additionally, the fifth plenary session has laid down a target growth rate toward the higher end of the 6% mark until 2020. The draft five-year plan released after the session also aims to double GDP and per capita income by 2020 from 2010 levels. According to research firm Nomura International, China will have to maintain an average rate of growth of 6.5% to achieve these targets.
Even though this rate is lower than the current target of 7%, it is in keeping with the ruling dispensations policy of moving toward a moderate pace of growth. As China transitions from a manufacturing economy to one powered by consumer spending, even this pace of growth will provide consumer oriented companies with a helpful environment.
Our Choices
Data from the Nielsen survey shows that consumers from the U.S. and China remain unfazed by the series of weak economic reports released recently. Instead, they have chosen to focus on long-term economic prospects.
As purchasing power continues to increase across both countries, consumer discretionary companies are bound to book gains. This is why it may be a good idea to add stocks from these sectors to your portfolio. Our selection is also backed by a good Zacks Growth Score and Zacks Rank.
We narrowed down our choices with the help of our new style score system.
Our research shows that stocks with a Growth Style Score of ‘A’ or ‘B’ when combined with a Zacks Rank #1 (Strong Buy) or Zacks Rank #2 (Buy) offer the best investment opportunities in the growth investing space.
TAL Education Group XRS provides after-school tutoring services to K-12 students in China.
TAL Education Group has a Zacks Rank #1 (Strong Buy) and a Growth Style Score of ‘B.’ The estimate for EPS growth for the current year has increased 35.6% over the last four weeks. The company expects earnings growth of 66.5% for the current year.
New Oriental Education & Technology Group Inc. EDU is the largest provider of private educational services in China.
New Oriental Education & Technology Group has a Zacks Rank #1 (Strong Buy) and a Growth Style Score of ‘B.’ The estimate for EPS growth for the current year has increased 3.5% over the last four weeks. The company’s projected earnings growth for the current year is 21.8%.
Masonite International Corp. DOOR is a designer and manufacturer of interior and exterior doors.
Masonite International has a Zacks Rank #2 (Buy) and a Growth Style Score of ‘A.' The estimate for EPS growth for the current year has increased 2.1% over the last four weeks. The company expects earnings growth of more than 100% for the current year.
Outerwall Inc. OUTR is a provider of automated retail solutions. It operates primarily in the U.S., U.K., Ireland, Canada and Puerto Rice.
Outerwall has a Zacks Rank #2 (Buy) and a Growth Style Score of ‘A.’ The estimate for EPS growth for the current year has increased 6.7% over the last four weeks. The company expects earnings growth of 35.4% for the current year.
Pool Corp. POOL is the world's largest wholesale distributor of swimming pool supplies, equipment and related products.
Pool Corp has a Zacks Rank #2 (Buy) and a Growth Style Score of ‘A.’ The estimate for EPS growth for the current year has increased 1.4% over the last four weeks. The company sees earnings growth of 16.1% for the current year.
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