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Earnings ESP

The holiday season is round the corner but the U.S. economy does not seem to be in the festive mood. The political tussle and the subsequent 16-day U.S. government shutdown, uneven economic recovery, and soft job opportunities are having a rippling impact on investors’ sentiment, which continues to be jittery.

The government shutdown and the debt-ceiling crisis took a toll on consumer confidence that dropped to 71.2 in October from 80.2 in September. This could be detrimental for the economy’s health, as consumer spending constitutes over two-third of the U.S. economic activity.

The overall scenario doesn’t seem too convincing as of now with the Federal Reserve continuing with its $85 billion monthly stimulus program to keep interest rates low and boost economic growth. The two-day Federal Open Market Committee (FOMC) meeting got underway on Tuesday and market experts are keeping their fingers crossed that the Fed would make no changes with respect to quantitative easing, until Apr 2014.

Investors and market experts are cautiously optimistic that nothing dramatic will happen in the meeting. In fact, expectations of a favorable outcome also helped the benchmarks climb up the ladder. The Dow Jones Industrial Average moved up 111.42 points (or 0.72%) yesterday before closing at 15,680.35. The Standard & Poor's 500 Index gained 9.84 points (or 0.56%) to finish the trading session at 1,771.95. The Nasdaq Composite Index jumped 12.21 points (or 0.31%) to end the day at 3,952.34.

Interestingly, the current situation as of now seems to be a mixed one. Onlookers await a positive outcome while the consumer confidence slumped to its 6-month low. In such a scenario, banking on its wide spectrum, the Food/Drug-Retail/Wholesale sector still remains a lucrative investment opportunity for investors. Thus, identifying the future winners from the sector would be a prudent idea to make an investment decision.

The Future Winners among the Crowd

Picking the best stocks from the Food/Drug-Retail/Wholesale space for one’s portfolio is a fairly simple task. One way to narrow down the list of choices during this earnings season is by looking 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.

Earnings ESP is our proprietary methodology for identifying stocks that have the best chance to surprise with their next earnings announcement.

For investors seeking to apply this strategy to their portfolio, we have highlighted 3 Food/Drug-Retail/Wholesale stocks that may stand out this earnings season:

Red Robin Gourmet Burgers, Inc. (RRGB - Analyst Report) is a Zacks Rank #2 stock with an earnings ESP of +3.70%. The current Zacks Consensus Estimate for third-quarter 2013 is pegged at 27 cents a share, reflecting an increase of 13% year over year. This Greenwood Village, Colo-based casual dining restaurant chain had registered an average positive earnings surprise of 25.6% over the trailing four quarters, and has a long-term earnings expectation of 13.4%. The company is slated to report results on Nov 5, 2013.

The Wendy's Company (WEN - Analyst Report) is a Zacks Rank #3 stock having an earnings ESP of +16.67%. The current Zacks Consensus Estimate for third-quarter 2013 is 6 cents a share, portraying a 106.1% growth from the prior-year period. This Dublin, Ohio based quick-service restaurant operator had registered an average positive earnings surprise of 35.8% over the trailing four quarters, and has a long-term earnings expectation of 21.8%. The company is scheduled to report on Nov 7, 2013.

Harris Teeter Supermarkets, Inc. is a Zacks Rank #3 stock and has an earnings ESP of +6.78%. The current Zacks Consensus Estimate for fourth-quarter fiscal 2013 is 59 cents a share, showcasing a 4.1% rise from the year-ago period. This Charlotte, N.C. -based supermarket chain will report on Oct 31, 2013.

Bottom Line

We believe that the above stocks with strong fundamentals and growth prospects are capable of quenching investors’ search for the right stocks. As the U.S. stocks look for a survival strategy, a sneak peek to the space for some possible outperformers backed by a favorable Zacks Rank and a positive Zacks Earnings ESP could be handy for investors.

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