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Improving Economy: 3 Retail Stocks to Bet On

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Banking on its wide spectrum, the retail sector remains a lucrative investment opportunity for investors. Moreover, the sector showcases consumer confidence and spending patterns, which are the important parameters to gauge the health of the economy.

So far this year, the broader markets have portrayed signs of a better pace of recovery and have thus sparked hopes of a better economic scenario going forward. The significant recovery in the stock market is reflected through strong gains for the broader market indices. S&P 500 has clocked gains of roughly 15.7%, while Dow Jones Industrial Average has gained approximately 16.1% so far this year.

The belief of an economic recovery might just have got stronger with the consumer confidence hitting a multi-year high. A recent Conference Board data suggested that Consumer Confidence Index improved to 81.4 in Jun 2013 from a revised 74.3 in May 2013. The index notched its highest level since Jan 2008, when it had touched 87.3.

This prompts a sense of optimism about steady increase in consumer spending going forward. Consumer spending accounts for over 2/3rd of the U.S. economic activity.

A recovery in the housing market, stock prices gaining momentum and improving labor market condition played vital roles to help the consumer confidence move north and also brought the retail stocks back to the center stage. A reflection of that was evident from the SPDR S&P Retail (XRT - Free Report) and Market Vectors Retail ETF (RTH - Free Report) surging roughly 29% and 25% year-to-date, respectively.

Thus, identifying the future winners from the sector would be a prudent idea to make an investment decision.

Three Stocks That Can Enrich Your Portfolio

Here we focus on three Zacks Rank #1 (Strong Buy) stocks with above-average earnings growth that you can capitalize upon and enrich your portfolio.

We suggest investing in Tiffany & Company (TIF - Free Report) , which holds a significant position in the world jewelry market. Its long-term growth prospects remain encouraging given its new product launches and focus on enhancing its geographic reach through store expansion program. Though the stock looks a bit pricey with a P/E (price-to-earnings) multiple of 22.37x, it should not disappoint investors given the company’s long-term expected earnings growth of 13.2% compared with 9.4% for the peer group.

Another stock that investors may look forward to is Restoration Hardware Holdings, Inc. (RH - Free Report) . Shares of this luxury home furnishings retailer have amassed a year-to-date return of roughly 104%. The company’s long-term estimated EPS growth rate is 25.8%, higher than the peer group average of 17.2%. Moreover, this Corte Madera, Calif. based company is expected to witness earnings growth of 46% in fiscal 2013 and 25% in fiscal 2014.

Hanesbrands Inc. (HBI - Free Report) , one of the leading players in innerwear, casual wear and active wear markets in the U.S., is another stock to bet on. We remain impressed with the company’s strong portfolio of brands and its continuous innovations. The company is gaining shelf space at major retail stores through various deals with retail giants.

Ahead of the opening bell today, the company announced that it is acquiring Maidenform Brands, Inc. (MFB), an intimate apparel company, for approximately $575 million in cash. The acquisition, which is expected to close in the fourth quarter of 2013, will add brands such as Maidenform, Control It!, Fat Free Dressing, Flexees and Lilyette to Hanesbrands already popular portfolio.

Shares of the Winston-Salem, NC-based Hanesbrands currently trades at a forward P/E of 15.50x, a discount of 13.2% to the peer group average of 17.86x, suggesting upside potential. Moreover, an impressive long-term expected earnings growth of 14% versus 12.2% for the peer group makes the stock attractive.

We believe that the above stocks with strong fundamentals and growth prospects are capable of quenching the investors’ search for right stocks.

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