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3 Retail Stocks Before the Fed Starts Tapering

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Market analysts are speculating that the Federal Reserve may consider tapering its $85 billion monthly stimulus program at the FOMC meeting on Dec 17 & 18. The program was initiated to keep interest rates low and boost economic growth. Now, with the recovery in the housing market, surging stock portfolios, a strengthening manufacturing sector and improving labor market conditions, the central bank may begin scaling down the bond buying campaign.

However, some market watchers still believe that the Fed may not be in a rush to pull back the QE3 program; instead they could wait until the economy gives more constructive and convincing signs. Moreover, they also argue that absence of inflationary pressure may provide Fed officials a reason to continue with the stimulus program. The Fed aims to bring the inflation rate at 2% to stimulate economic growth, as chances of deflation lower the incentives.

Fed Chairman Ben Bernanke had earlier indicated that easing of monetary stimulus will happen only after taking into account job conditions, inflation and economic growth. Recent positive economic data has intensified the debate whether the Fed should go for a gradual roll back of stimulus now or wait until next year. But one thing officials have been trying to convince investors that even if the tapering is initiated, they would try to keep the interest rates near zero until the unemployment rate drops below 6.5%.

Looking at the favorable economic numbers, let’s start with consumer confidence. The preliminary data for December, released by University of Michigan and Thomson Reuters, showed that the consumer-sentiment index jumped to 82.5 from November’s reading of 75.1, buoyed by improving fundamentals. Consumer confidence is a key determinant for the economy’s health with consumer spending accounting for over two-thirds of the U.S. economic activity.

What is inspiring consumer spending is the improving job prospects, with the unemployment rate declining to a five-year low of 7% in November. Further boosting sentiment was the total non-farm payroll data that said employment grew 203,000 in November, higher than the consensus estimate of 182,000. The National Employment Report released by Automatic Data Processing (ADP - Free Report) stated that the U.S. nonfarm private sector employment added 215,000 jobs, higher than the expected increase of 173,000 jobs.

The latest to add in the streak of encouraging economic indicators is the retail sales data released by the U.S. Department of Commerce that highlights renewed consumer confidence leading to a 0.7% jump in November retail sales. The gain, which is the most since Jun 2013, followed a 0.6% rise witnessed in October, thus removing the cloud of obscurity about economic growth. Third quarter gross domestic product (GDP) grew at an annualized rate of 3.6%.

Market seems to have a mixed reaction at the end of last week’s trading session over the Fed’s decision regarding the stimulus program. The Dow Jones Industrial Average gained 15.93 points (or 0.10%) to close at 15,755.36. The Standard & Poor's 500 Index shed 0.18 points (or 0.01%) to finish the trading session at 1,775.32. The Nasdaq Composite Index rose 2.57 points (or 0.06%) to end at 4,000.98.

As of now it is very difficult to predict the outcome of the final meeting on this brainstorming issue, but for now we can focus on 3 retail stocks that look strong amid the current scenario. Here are three stocks that you can capitalize on and enrich your portfolio:

We suggest investing in Hanesbrands Inc. (HBI - Free Report) , a designer and manufacturer of basic apparel in the United States. Shares of this Zacks Rank #1 (Strong Buy) trades at a forward P/E (price-to-earnings) of 17.58x, a marginal discount of 2% to the peer group average of 17.93x, and have amassed a year-to-date return of 90.7%.This Winston-Salem, NC-based company had registered an average positive earnings surprise of 10.2% over the trailing four quarters, and has a long-term earnings expectation of 15.6% that makes it look attractive.

G-III Apparel Group, Ltd. (GIII - Free Report) , a manufacturer and marketer of women’s and men’s apparel, is another stock to bet on. This Zacks Rank #1 (Strong buy) stock has amassed a year-to-date return of 95.1% and is expected to witness earnings growth of 15.9% in fiscal 2013 and 80% in fiscal 2014. The company’s long-term estimated EPS growth rate is 16.5%, higher than the peer group average of 13.8%. Shares of this New York-based company trades at a forward P/E of 18.35x, a discount of 16.9% to the peer group average of 22.07x. The company had registered an average positive earnings surprise of 96.6% over the trailing four quarters.

Another stock that investors may look forward to is Tiffany & Co. (TIF - Free Report) , the renowned jewelry maker. This Zacks Rank #2 (Buy) stock has amassed a year-to-date return of roughly 53.6%, and is expected to witness earnings growth of 10.3% in fiscal 2013 and 11.8% in fiscal 2014. Though the stock looks a bit pricey with a P/E multiple of 23.57x, it should not disappoint investors given the company’s long-term expected earnings growth of 13.5%. This New York-based company had registered an average positive earnings surprise of 18.1% over the trailing four quarters.

We believe that the above stocks that boast strong fundamentals and growth prospects are capable of satisfying investors’ search for market winners. As the economy awaits the Fed’s decision, a sneak peek into the space for some possible outperformers backed by a favorable Zacks Rank could be handy for investors.

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