The fall in crude prices crushed energy stocks in 2015, but was a tailwind to the retail and consumer discretionary spaces.
The slump in gasoline prices this year is widely expected to continue in the near future. Lower gas prices mean that consumers in the U.S. have to allocate a smaller proportion of their disposable income toward fuel costs. In other words, lower gasoline prices should boost consumers’ spending power. This is likely to benefit stocks from the retail and discretionary segments. Adding such stocks to your portfolio would be a smart move at this juncture.
Drop in Gasoline Prices
According to the U.S. Energy Information Administration (EIA), the U.S. weekly regular gasoline retail prices per gallon touched $2.026 per gallon on Dec 21, down 37.7 cents from the same time last year. Industry experts anticipate that gasoline prices will keep declining in the first quarter of 2016 as crude prices continue to suffer.
Supplies of gasoline were up for the sixth time in as many weeks, as demand weakened. The 1.11 million-barrel rise – in line with analysts’ projection – took gasoline stockpiles up to 220.50 million barrels.
Russia and OPEC are not curtailing their oil production and the U.S. producers are also following suit, despite weak global consumption. Oil – which was perched at around $110 per barrel just 18 months ago – is now struggling to breach $40. Recently, it sunk to a 7-year low of $34.29 a barrel.
Retail Sector Holds the Baton
The U.S. economy is largely healed and ready to accelerate in 2016. The message was loud and clear, when the Federal Reserve raised the interest rate by a quarter percentage points to 0.25–0.50%, for the first time in nearly a decade. Market experts believe that the economy has shown considerable strength and is more balanced now to withstand headwinds such as overseas growth turmoil, weak foreign currencies and sluggishness in the energy sector.
Given the underlying economic strength, the retail space looks buoyant. One can’t ignore the gradual recovery in the housing market either, along with an improving labor market. The unemployment rate around 5% is playing a key role in lifting up buyers’ confidence.
The U.S. economy created a total of 211,000 jobs in November, beating the consensus estimate of 199,000. Moreover, initial claims reached almost a 42-year low, as the number of Americans filing for unemployment benefits declined 5,000 to a seasonally adjusted 267,000 for the week ended Dec 19.
The recently released U.S. GDP data unveiled that the economy grew at a rate of 2% in the third quarter (July–September), while consumer spending increased 3%. Though the pace of economic growth decelerated from 3.9% registered in the second quarter, analysts are hopeful of a pickup in momentum in the final quarter and healthy growth in the first half of 2016. Market experts anticipate that the U.S. economy will expand at a rate of 2.1% in 2015 and 2.4% in 2016.
We expect these positive sentiments to translate into higher consumer spending, which accounts for over two-thirds of U.S. economic activity.
5 Stocks to Invest Your Money
With consumers appearing ready to loosen their purse strings, it’s time investors reshuffle their portfolio. A lower proportion of income being spent on fuel costs and additional funds for discretionary purchases should be enough to propel the retail space. So add few retail stocks to your portfolio that have solid fundamentals.
We have identified five stocks based on their favorable Zacks Rank #1 (Strong Buy) or #2 (Buy) + their expected long-term earnings per share growth rate of 10% or more.
We suggest investing in Shake Shack Inc. SHAK, which sports a Zacks Rank #1 and has a long-term earnings growth rate of 27.5%. This New York-based company delivered an average positive earnings surprise of 134.5% over the trailing four quarters. This operator of Shake Shack restaurants is expected to witness earnings growth of 99% in 2015 and 18.3% in 2016. The Zacks Consensus Estimate too has moved up over the past 60 days.
American Eagle Outfitters, Inc. AEO, retailer of apparel and accessories, is another solid bet, with a Zacks Rank #1. The Pittsburgh, PA-based company delivered an average positive earnings surprise of 16.7% over the trailing four quarters, and has a long-term earnings growth rate of 10%. The company is expected to witness earnings growth of 71.4% in fiscal 2015 and 6.5% in fiscal 2016. The Zacks Consensus Estimate has also been trending up over the past 30 days.
Another stock that investors may look forward to is Francesca's Holdings Corporation FRAN, with a Zacks Rank #1 and a long-term earnings growth rate of 16%. This Houston-based operator of a chain of retail boutiques offering fashion apparel, jewelry and accessories delivered an average positive earnings surprise of 2.4% over the trailing four quarters. The company is expected to witness earnings growth of 5.7% in fiscal 2015 and 13.2% in fiscal 2016. The Zacks Consensus Estimate too has been on the rise over the past 30 days.
Investors can also count on Foot Locker, Inc. FL, a retailer of athletic shoes and apparel, with a Zacks Rank #2 and a long-term earnings growth rate of 12.3%. The New York-based company delivered an average positive earnings beat of 11.2% over the trailing four quarters. It is expected to witness earnings growth of 18.9% in fiscal 2015 and 11.1% in fiscal 2016. The Zacks Consensus Estimate too has been on the rise over the past 60 days.
Last but not least is Hanesbrands Inc. HBI, a designer and manufacturer of basic apparel in the U.S., with a Zacks Rank #2 and a long-term earnings growth rate of 17%. The Winston-Salem, NC-based company delivered an average earnings beat of 3.5% over the trailing four quarters. It is expected to witness earnings growth of 18.5% in 2015 and 12.5% in 2016. The Zacks Consensus Estimate too has been on the rise over the past 60 days.
Bottom Line
The stocks above hold promise with healthy fundamentals. We wish the addition of these five stocks turns out a bonanza for you. Happy New Year!
Want to find the best stocks for 2016? Find out more information about the market-crushing Zacks Top 10 list here >>>
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Be the first to comment