The Federal Reserve may have just got another solid reason to go for a rate hike when it meets this month. Consumer spending, which accounts for over two-thirds of U.S. economic activity, witnessed a sharp increase in almost seven years. The Commerce Department unveiled that consumer spending advanced 1% in April better than analysts’ expectation of a 0.7% rise and up significantly from a flat reading in March and a 0.2% jump in February.
Consumers purchased automobiles and other durable goods with renewed vigor, as personal income increased 0.4% and disposable personal income rose 0.5%. April stood out as the best month since Aug 2009 with respect to consumer spending. Strong consumer spending is a sheer reflection of the economy gaining momentum which had nearly stalled in the beginning of the year, with a tepid 0.8% growth in the first quarter.
Market experts remained cautiously optimistic about acceleration in economic growth in the second quarter. On the one hand, they are citing that consumers are likely to spend more supported by rising income, an improving job market and gains in house price. On the other hand, they are not ignoring the fact that consumer confidence dampened somewhat last month. According to the recent Conference Board data, the Consumer Confidence Index dipped to 92.6 in May from April’s revised reading of 94.7, and also came in below analysts’ projection of 96.0.
With an expected rebound in the economy, the retail space is bubbling with optimism. Industry analysts predict that encouraging economic data might reflect in an interest rate hike – a step toward “normalizing monetary policy.” Well, the Federal Reserve is surely keeping a close watch on the ongoing economic activities and will arrive at a decision only after taking into account all the relevant factors.
But for now, how about being a wise investor? Let’s look for some retail stocks that could prove to be great additions against the backdrop of higher consumer spending.
5 Prominent Picks
We suggest investing in Delta Apparel Inc. DLA, which flaunts a Zacks Rank #1 (Strong Buy). The Greenville, SC-based company delivered an average positive earnings surprise of 28.5% over the trailing four quarters. This designer, manufacturer and marketer of portfolio of lifestyle basics and branded active wear apparel and headwear products is expected to witness earnings growth of more than four times in fiscal 2016 and 25% in fiscal 2017. The Zacks Consensus Estimate too has moved up over the past 30 days.
Burlington Stores, Inc. BURL with a Zacks Rank #2 (Buy) and long-term earnings growth rate of 17.7% is a solid bet. This Burlington, NJ based retailer of branded apparel products delivered an average positive earnings surprise of 23.2% over the trailing four quarters. It is expected to witness earnings growth of 20.3% in fiscal 2016 and 17.1% in fiscal 2017. The Zacks Consensus Estimate too has been on the rise over the past 7 days.
Another stock that deserves a place in your portfolio is The Home Depot, Inc. HD, which carries a Zacks Rank #2 and has a long-term earnings growth rate of 13.7%. This Atlanta, GA based home improvement retailer delivered an average positive earnings surprise of 4.2% over the trailing four quarters. It is expected to witness earnings growth of 16.5% in fiscal 2016 and 13.1% in fiscal 2017. The Zacks Consensus Estimate too has been trending up over the past 30 days.
Investors can also count on The Kroger Co. KR, the operator of supermarkets and multi-department stores that carries a Zacks Rank #2 and has a long-term earnings growth rate of 9.7%. The Cincinnati, OH-based company delivered an average positive earnings surprise of 7.3% over the trailing four quarters. The company is expected to witness earnings growth of 8.5% in fiscal 2016 and 9.6% in fiscal 2017.
The last but certainly not the least stock that you may add to your portfolio is BJ's Restaurants, Inc. BJRI. This operator of casual dining restaurants carries a Zacks Rank #2 and has a long-term earnings growth rate of 17.9%. This Huntington Beach, CA based company delivered an average positive earnings surprise of 18.5% over the trailing four quarters. The company is expected to witness earnings growth of 22.1% in 2016 and 13.6% in 2017. The Zacks Consensus Estimate too has been rising over the past 60 days.
Bottom Line
Definitely increased consumer spending gives a reason to cheer but questions on how long the improvement will last linger. Market pundits believe that an improving labor market and rising income will surely increase confidence and instigate spending. And if this happens and sustains, it will largely help the economy to emerge strongly. A balanced economy with inflation gradually crawling toward the desired level of 2% may prompt the Fed Chair Janet Yellen to go for a rate hike. In such a market scenario, retail will always be one of the lucrative sectors to invest in.
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