Fed Tapers Further: 2 Restaurant Stocks Poised to Gain
After a high political and economic drama in 2013, the year 2014 saw a soft start given the not-so-convincing emerging economies, loss of steam in stock markets and a severe winter that locked consumers indoors. So far this year, the S&P 500 has shed roughly 1.8%, Dow Jones Industrial Average has lost approximately 3.9%, while the Nasdaq Composite Index has fallen about 0.1%.
Despite volatility in the indices, market analysts’ are hopeful that the U.S. economy will gain strength as the year progresses and register a GDP growth of about 3%. The belief that the economy is on a recovery path might just have gotten stronger with increased consumer confidence in January on better job prospects and a perked up business environment.
A recent Conference Board data suggested that Consumer Confidence Index improved to 80.7 in Jan 2014 from 77.5 in Dec 2013. This suggests a steady increase in consumer spending going forward. Consumer spending – which accounts for over two-third of the U.S. economic activity – is being inspired by an improving labor market. Notably, the unemployment rate declined to 6.6% in January, the lowest level since Oct 2008.
Consumer spending rose 0.4% in December, following a 0.6% increase in November, further hinting that the derailed economy is gaining traction.
Now, with economic activity gradually gaining pace, the Federal Reserve has scaled down the monthly bond buying campaign for the second time to $65 billion from $75 billion. Looking back, the Federal Reserve had initiated a monthly stimulus program of $85 billion to boost economic growth and keep interest rates low. The Fed now lowered its purchase of mortgage-backed securities by $5 billion to $30 billion a month and its purchase of Treasury securities by another $5 billion to $35 billion per month.
The Fed had earlier indicated that it would ease monetary stimulus only after considering the job picture, inflation and economic growth. But officials are still trying to convince investors that despite the tapering, they would try to keep the interest rates near zero until unemployment rate drops below 6.5%. The Fed aims to bring the inflation rate to 2% to stimulate economic growth, as chances of deflation lowers the incentives.
The second round of tapering bears evidence to the underlying strength in the economy. It also shows that consumer confidence moving north and that they are loosening their purse strings, bringing the retail stocks back to the center stage.
The year 2014 looks more promising for Restaurant stocks than the risk-ridden 2013. Moreover, the sector showcases some Restaurants that have shown strong consumer confidence and spending patterns, which are important parameters in gauging the health of the sector. Thus, identifying the future winners from the sector would be a prudent idea before making an investment decision.
The Future Winners
Picking the best stocks from the Restaurant space for one’s portfolio is a fairly simple task. The list of choices can be narrowed down 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. The earnings ESP shows the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate.
For investors seeking to apply this strategy to their portfolio, we have highlighted 2 Retuarant stocks that may stand out this earnings season:
Jack in the Box Inc. (JACK - Snapshot Report) is a Zacks Rank #2 stock with an earnings ESP of +1.54%. The current Zacks Consensus Estimate for first-quarter fiscal 2014 is pegged at 65 cents a share, reflecting an increase of 21.3% year over year. This San Diego, Calif. based quick-service restaurant operator had registered positive earnings surprise over the trailing four quarters with an average beat of +14.6%, and has a long-term earnings expectation of 15.6%. The company is slated to report results on Feb 19.
Texas Roadhouse, Inc. (TXRH - Snapshot Report) is a Zacks Rank #2 stock and has an earnings ESP of +4.35%. The current Zacks Consensus Estimate for fourth-quarter 2013 is 23 cents a share. This Louisville, Ky. based full service casual dining restaurant chain had registered positive earnings surprise over the trailing four quarters with an average beat of +2.5%, and has a long-term earnings expectation of 13.1%. The company will report on Feb 24.
We believe that the above stocks boast strong fundamentals and growth prospects that can quench investors’ appetite for market winners. As the U.S. stocks look for a survival strategy, a sneak peek into the space for some possible outperformers backed by a favorable Zacks Rank and a positive Zacks earnings ESP could be handy for investors.