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Last time, we discussed 3 Retail Stocks to Power Your Portfolio, particularly in an unfavorable economy when the market mood wavers. But is it enough to look for a favorably ranked stock while picking a market winner?

To an extent, yes. But if the stock is powered by an optimism that the company will beat the earnings estimate in the upcoming quarter, your portfolio’s chance of giving you higher returns increases. Investors exercise extra caution while choosing their portfolio but returns are not guaranteed every time.

Today, we bring a Profitable Mix: Favorable Zacks Rank + Positive Earnings ESP. A favorable rank indicates positive estimate revisions by analysts who are optimistic on the future of companies. Then again, Earnings ESP (ESP: Expected Surprise Prediction), is our proprietary methodology for identifying stocks that have the best chance to surprise with their next earnings announcement. It shows the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate.

Here, we will discuss 3 retail stocks carrying an impressive Zacks Rank and having a positive Earnings ESP. Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%. These stocks we believe have the potential to enrich your portfolio in an economy which is still undergoing recovery. The third and final data for real gross domestic product (GDP) revealed a 2.9% decline in the first quarter of 2014, thus taking away some sheen from the economy, which had barely started to look strong.

Market watchers believe that the contraction stemmed from an inclement weather condition that locked consumers indoors, hampered production and construction activities, and resulted in to soft home and auto sales. Consumer spending, which accounts for over two-third of the U.S. economic activity, also grew a moderate 1% in the quarter, down from the 3.1% jump anticipated.

However, economists believe that the softness in the first quarter was only temporary. They are hopeful that a much favorable weather condition now, an improving labor market, recovery in the housing market and surging demand, will translate into strength in the U.S. economy as the year progresses. Scaling down of the bond buying campaign for the fifth time to $35 billion, rising consumer confidence (85.2 in June 2014 from 82.2 in May 2014) and 5-year low unemployment rate of 6.3%, hint at a rebounding economy.

Though we believe that the economy will eventually come out of the woods, the pace of recovery has undoubtedly been dented. In such a scenario, for investors seeking to apply our profitable mix strategy to their portfolio, we have identified 3 stocks in the Retail/Wholesale sector.

Prominent Picks

Restoration Hardware Holdings, Inc. (RH - Snapshot Report) is a Zacks Rank #1 (Strong Buy) stock having an earnings ESP of +1.59%. The current Zacks Consensus Estimate for second-quarter fiscal 2014 is 63 cents a share, portraying 28.8% growth from the prior-year period. This Corte Madera, CA-based home furnishing retailer registered an average positive earnings surprise of 37% over the trailing four quarters, and has a long-term earnings growth rate of 28.6%. The company is expected to report on Sep 9, 2014.

Williams-Sonoma Inc. (WSM - Snapshot Report) is a Zacks Rank #2 (Buy) stock with an earnings ESP of +1.89%. The current Zacks Consensus Estimate for the second quarter of fiscal 2014 is pegged at 53 cents a share, reflecting an increase of 8.3% year over year. This San Francisco, CA-based specialty retailer of home products registered an average positive earnings surprise of 5.8% over the trailing four quarters, and has a long-term earnings growth rate of 14.2%. The company is expected to report on Aug 27, 2014.

Zumiez, Inc. (ZUMZ - Analyst Report) is a Zacks Rank #2 (Buy) stock having an earnings ESP of +11.11%. The current Zacks Consensus Estimate for second-quarter fiscal 2014 is 18 cents a share. This Lynnwood, WA based specialty retailer of action sports related apparel and footwear registered an average positive earnings surprise of 41.4% over the trailing four quarters, and has a long-term earnings growth rate of 14.2%. The company’s earnings are expected for a Sep 4, 2014 release.

Bottom Line

Who doesn’t want a portfolio of stocks that have the potential to outperform and beat earnings estimate? You can use Zacks Stock Screener to find stocks with this winning combination.

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