The second-quarter earnings season has just started. It’s that time of the year again when the investor community is busy comparing estimates with actual outcomes. Prior to the releases, investors are keen on rebalancing their portfolio to include stocks that are likely to trump estimates. This leads to the obvious question of how to find the potential winners?

Among the 16 Zacks categorized sectors, we are focusing on Retail-Wholesale today. The sector has gained 12.8% so far in the year and has comfortably outperformed the S&P 500 index that advanced 8.4%. We believe that the favorable economic indicators and friendlier fiscal and regulatory policies from the current regime bode well for the sector.

Factors Setting the Tone for the Sector

The rebound in oil prices from all-time lows, improving labor market and gradual recovery in the housing market signal that the economy is on a recovery mode. Per the Labor Department, the economy added 222,000 jobs in June, up from 152,000 and 207,000 in May and April, respectively, while the unemployment rate was 4.4%. These factors are favorable for retailers and definitely play a crucial role in raising buyers’ confidence.

Consumer confidence, which ebbed some time back, took an unexpected “U” turn in June, indicating that the economy remains well on track, barring a few hiccups. Steady job additions and gradual wage acceleration offer a perfect background to drive consumer confidence and pave the way for another rate hike this year. Consumer Confidence Index rose to 118.9 in June from May’s reading of 117.6. We expect this positive sentiment to translate into higher consumer spending that may help revive sales.

Changing Retail Dynamics

The retail landscape has been witnessing a sea change with the focus gradually shifting to online shopping. This transition in consumer shopping pattern is compelling retailers to fast adapt to the changes in the ecosystem. Retailers now have no option left but to keep pace with the changing retail scenario or get eliminated. They are now focusing more on enhancing their omni-channel capabilities, optimizing store fleet and restructuring activities.

We note that U.S. retail sales in May recorded the steepest drop (down 0.3%) in 16 months. But sales at non-store retailers inched up 0.8% sequentially and increased 10.2% from the prior-year period. Kiplinger’s latest forecast shows that retail sales, excluding gasoline, are expected to jump 3.5% in 2017. The report further suggests that e-commerce sales are expected to increase 15% this year compared with 13% in 2016.

Initial Days of the Earnings Season

The second-quarter 2017 earnings season has just begun with 23 S&P 500 members or 4.6% of the index’s total membership having reported their quarterly results as of Jul 7, according to the latest Zacks Earnings Preview report.

Per the report, of the 23 S&P 500 companies that have come up with their quarterly numbers, approximately 82.6% have delivered positive earnings surprises, while 87% beat top-line expectations. According to the report, earnings of S&P 500 companies that have reported so far are up 26.1% from the same-period last year, while revenues have increased 8.3%.

About 14.3% of the S&P 500 companies in the Retail-Wholesale sector have reported their results, wherein 66.7% beat earnings and revenue estimates. While earnings rose 9% year over year, revenues climbed 4.9%. According to the report, the sector is expected to record top-line growth of 3.8% but is likely to witness earnings decline of 0.4% this season.

Likely Winners for the Season

The Retail-Wholesale sector has not been an outstanding performer and identifying the winners is definitely a herculean task. Given the numerous stocks in the sector that almost always muddle one’s stock-picking prowess, the Zacks methodology could offer some relief. Our research shows that for stocks with the combination of a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) and a positive Earnings ESP, the chance of a positive earnings surprise is as high as 70%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

An earnings beat boosts investors’ confidence in the stock, which is reflected in its rapid price appreciation. These stocks could therefore turn out to be great additions to your portfolio ahead of their earnings releases.

McDonald's Corporation (MCD Quick QuoteMCD - Free Report) , which is slated to report its second-quarter 2017 results on Jul 25, is a solid bet with a long-term earnings growth rate of 9.3%. The Zacks Consensus Estimate for the quarter is pegged at $1.62. The company delivered an average positive earnings surprise of 7% over the trailing four quarters. This restaurant operator has an Earnings ESP of +4.94% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

We also suggest investing in Dillard's, Inc. (DDS Quick QuoteDDS - Free Report) , which is expected to release its second-quarter fiscal 2017 results on Aug 10. This fashion apparel, cosmetics, and home furnishing retailer has a Zacks Rank #3 and an Earnings ESP of +40.00%. The Zacks Consensus Estimate for the quarter currently stands at 10 cents. The company has a long-term earnings growth rate of 2.6%.

Another lucrative option is Nordstrom, Inc. (JWN Quick QuoteJWN - Free Report) , the fashion specialty retailer, which provides apparel, shoes, cosmetics, and accessories. The stock carries a Zacks Rank #3 and has an Earnings ESP of +6.56%. The Zacks Consensus Estimate for the quarter is pegged at 61 cents. The company registered an average positive earnings surprise of 41% over the trailing four quarters and has a long-term earnings growth rate of 6%. The company is slated to report its second-quarter fiscal 2017 results on Aug 10.

Another stock that you may consider is L Brands, Inc. with a Zacks Rank #3 and an Earnings ESP of +2.38%. The Zacks Consensus Estimate for the quarter is pegged at 42 cents. The company delivered an average positive earnings surprise of 11.1% over the trailing four quarters and has a long-term earnings growth rate of 11.3%. This specialty retailer of women’s intimate and other apparel, beauty and personal care products is slated to report second-quarter fiscal 2017 financial numbers on Aug 16.

Investors can even count on Costco Wholesale Corporation (COST Quick QuoteCOST - Free Report) with a Zacks Rank #3 and an Earnings ESP of +0.50%. The Zacks Consensus Estimate for the quarter is pegged at $1.99. The company, which operates membership warehouses, has a long-term earnings growth rate of 9.7%. The company is scheduled to report its fourth-quarter fiscal 2017 results on Oct 5.
These five stocks are not the only ones to bet on. With the help of the Zacks Stock Screener and some permutation and combination, you can find out other retail stocks that have the potential to beat the market.

More Stock News: 8 Companies Verge on Apple-Like Run

Did you miss Apple's 9X stock explosion after they launched their iPhone in 2007? Now 2017 looks to be a pivotal year to get in on another emerging technology expected to rock the market. Demand could soar from almost nothing to $42 billion by 2025. Reports suggest it could save 10 million lives per decade which could in turn save $200 billion in U.S. healthcare costs.

A bonus Zacks Special Report names this breakthrough and the 8 best stocks to exploit it. Like Apple in 2007, these companies are already strong and coiling for potential mega-gains. Click to see them right now >>