A Consumer Driven Recovery?

About 6 months ago you could not read a news story that involved "the bottom". Is it in yet? How much further will we fall? and so on. Here we are knocking on winter's door and to me it seems like the opposite. Where is the peak? How much higher can we go?

Now that the former is in the rear-view mirror and we in the midst of the latter this earnings season is going to be vital. What am I looking at? Some of the best performing sectors in the rally, consumer discretionary and retailers. If you have been heavy in that area, you are dancing.

Keys to the Recovery

While I am focusing on consumer-based earnings, there is more than which sector to invest in. I will be looking for organic or top line growth. This will indicate a confident consumer and real economic strength, rather than an up tick in earnings because a company found a way to cut costs.

That is not only going to be good for the company's future, but the economy's as well.

What Should I Do?

Now that the rally has tapered off it gives us a good opportunity to position ourselves for what is next. I, and the other Zacks Elite analysts, are taking a cautiously optimistic approach. This means staying/getting long companies that rely on spending, but ready hit the sell button at a moments notice.

In particular, I am looking at stocks with a Zacks Rank of #1 or #2, with rising estimates in any type of industry directly driven by the consumer. A solid value is also important, especially in an area that as performed well, yielding plenty of swollen P/E's.

A Few that I Like

Dominos Pizza (DPZ - Snapshot Report) is a staple of pizza parties and Friday nights at home. Estimates are creeping up, with 3 revisions in the past month, as the next earnings report nears. The company is set to announce quarterly results on Oct 13.

A slice of the company will cost you just 11 times earnings and the PEG ratio is 0.9 times. Year-over-year earnings growth is currently forecasted at 7% and 12% for this year and the next, respectively.

Kirkland's Inc. (KIRK - Analyst Report) has a bit longer until it reports, in November, but its Zacks Consensus Estimate has spiked. The average estimate for this year is $1.11, up from 78 cents 2 months ago. This would be a year-over-year growth of 270%. Earnings next year are supposed to dip for the home decor company, but like I said, look at the earnings report for real growth before you jump in.

Fuqi International Inc (FUQI - Snapshot Report) is a Chinese Jewelry company. We will have to wait about a month for the company to report but if there is solid growth, shares selling at 14 time forward earnings will be a steal. Not to mention, with expected growth rates of 48% and 12%, the PEG ratio is just 0.5.

Be Patient

Consumers, i.e. you and I, are in the driver's seat right now and have to power to take us to a better economy, or send us right back into a recession. So, with a level market, you can get into these sectors at a reasonable price or even wait to see how the earnings trend plays out. Either way, keep an eye on all the earnings news for guidance, not just the consumer stocks you own.

Additional Resources

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