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Retail Sector Holds the Cards: 4 Stocks to Play

It is time to rejuvenate your portfolio once again, as we gradually embark upon Q1 2016 earnings season. The economic scenario has not changed much from the fourth quarter which was defined by a strong dollar, sluggishness in the energy sector and overseas turmoil. The first quarter has endured this, as well.

The U.S. stock market displayed a sluggish performance at the start of the year, owing to fears of global unrest and plunging oil prices. Although the market has recouped much of the losses, it is yet to breathe a sigh of relief. Market experts cited that consumer spending, which has yet to pick up steam, might prove to be a hurdle in the path of economic growth, which expanded 1.4% during the fourth quarter of 2015.

The Commerce Department unveiled that consumer spending, which accounts for over two-thirds of U.S. economic activity, inched up 0.1% in February. This, however, was not the end as it revised the January spending data to a 0.1% gain from solid 0.5% growth reported earlier. However, a little groundwork will definitely give a fair idea that the economy isn’t in such a bad shape, and the “Retail Sector” still holds the baton.

According to recent Conference Board data, the Consumer Confidence Index increased to 96.2 in March from the February reading of 94.0. A gradual recovery in the housing market as well as the manufacturing sector coupled with an improving labor market is playing a major role in lifting buyers’ confidence. With the unemployment rate hovering around 5% and total nonfarm payroll employment rising by 215,000 last month – of which retail employment increased 48,000 – job prospects look better.

As reported in February, the National Retail Federation projects retail sales to increase 3.1% in 2016, which is higher than the 10-year average sales growth of 2.7%. Non-store sales are expected to improve in the band of 6–9%.

4 Stocks to Put Your Money Into

Every cloud has a silver lining, so don’t just sit on the fence. Instead, focus on stocks that appear promising and have the potential to beat the consensus estimate. 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 is to look 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.

For investors seeking to apply this strategy to their portfolio, we have highlighted 4 Retail/Wholesale stocks poised to outperform estimates. An earnings beat boosts investor confidence in a stock, which is reflected in the rapid stock price appreciation. These stocks could turn out to be great additions to your portfolio ahead of their earnings releases.

We have highlighted stocks that have convincingly beaten earnings estimates in the trailing four quarters, hold excellent prospects and are therefore well positioned for future earnings growth.

Here are the picks:

We suggest investing in McDonald's Corp. MCD, which flaunts a Zacks Rank #2 and an Earnings ESP of +1.74%. The current Zacks Consensus Estimate for the first quarter of 2016 is pegged at $1.15, reflecting a year-over-year increase of about 4.7%. The Oak Brook, IL-based company delivered an average positive earnings surprise of 5.4% over the trailing four quarters. This global foodservice retailer, which is expected to announce results on Apr 22, has a long-term earnings growth rate of 9%.

Yum! Brands, Inc. YUM, the operator of quick service restaurants, is another solid bet. The stock carries a Zacks Rank #3 and has an Earnings ESP of +1.21%. The current Zacks Consensus Estimate for first-quarter 2016 stands at 83 cents, portraying roughly 3.4% growth from the prior-year quarter. Based in Louisville, KY, the company delivered an average positive earnings surprise of 4.3% over the trailing four quarters, and has a long-term earnings growth rate of 11%. The company is expected to report results on Apr 20.

Investors can also count on The Home Depot, Inc. HD, a home improvement retailer, with a Zacks Rank #3 and an Earnings ESP of +0.75%. The current Zacks Consensus Estimate for the first quarter of fiscal 2016 stands at $1.33, reflecting 14.7% growth from the year-ago period. This Atlanta, GA-based company registered an average positive earnings surprise of 2.5% over the trailing four quarters, and has a long-term earnings growth rate of 13.3%. The company is expected to report results on May 17.

Last but not the least is Tractor Supply Company TSCO with a Zacks Rank #3 and an Earnings ESP of +8.70%. The current Zacks Consensus Estimate for the first quarter of 2016 stands at 46 cents, portraying 9.7% growth from the prior-year quarter. Based in Brentwood, TN, this operator of rural lifestyle retail stores delivered an average positive earnings surprise of 1.4% over the trailing four quarters, and has a long-term earnings growth rate of 16.1%. The company is expected to report financial numbers on Apr 20.

Final Verdict

With many occurrences in the financial world, investors should remain calm at this juncture and not rush to bet their hard-earned money on stocks that may backfire. Rather be rational and cherry pick stocks that are backed by sound fundamentals and prudent calculations based on their past performance. You can use the Zacks Stock Screener to find other stocks with the winning combination as highlighted above.

The earnings season separates the wheat from the chaff. These stocks, by virtue of their favorable Zacks Rank, positive Earnings ESP and growth prospects, are likely to come out with flying colors.

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 >>


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
 
HOME DEPOT (HD): Free Stock Analysis Report
 
YUM! BRANDS INC (YUM): Free Stock Analysis Report
 
MCDONALDS CORP (MCD): Free Stock Analysis Report
 
TRACTOR SUPPLY (TSCO): Free Stock Analysis Report
 
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