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Two Strong Data Allay Inflation-Led Slowdown Fears: 5 Picks

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Wall Street has seen an impressive bull run so far this year. Of late, market participants are concerned about mounting inflationary pressure that reached the highest level in three decades in October. Nevertheless, two strong economic data released on Nov 16, namely, retail sales and industrial production data for October, reiterated the continuation of robust U.S. economic recovery.

At this stage, it will be prudent to invest in momentum stocks with a favorable Zacks Rank. We have selected five such stocks. These are — Dillard's Inc. (DDS - Free Report) , Boot Barn Holdings Inc. (BOOT - Free Report) , SPX FLOW Inc. (FLOW - Free Report) , Penske Automotive Group Inc. (PAG - Free Report) and Builders FirstSource Inc. (BLDR - Free Report) .

Two Solid Data Likely to Abate Inflation-Led Fears

Market participants were concerned that mounting inflation, which has originated from a prolonged supply-side bottleneck will halt the pace of U.S. economic growth. A section of economists and financial researchers have said that galloping inflation may force the Fed to speed up the monthly bond-buy termination process and advance the timing of the first interest rate hike to early 2022.

However, October’s consumer-centric retail sales data and business-centric industrial production data reaffirm that the U.S. economy is firmly on the growth trajectory. These data have raised investors’ expectations of a year-end rally on Wall Street.

Strong Retail Sales Data

Retail sales in October climbed 1.7% beating the consensus estimate of 1.3%. Moreover, September’s data was revised upward to 0.8% from 0.7% reported earlier. Core retail sales (excluding auto) jumped 1.7% in October, surpassing the consensus estimate of 1%. The data showed that the spending habit of U.S. consumers remained intact despite soaring inflation. Notably, personal expenditure is the largest driver of U.S. GDP.

Several market researchers have projected strong U.S. holiday sales this year supported by a sharp decline in new cases of the Delta variant of coronavirus and the nationwide COVID-19 vaccination.

The National Retail Federation has projected November/December retail sales in the range of $843.4 billion to $859 billion, up 8.5% to 10.5% from 2020. Business consultant Deloitte forecasts growth of 7% to 9% or between $1.28 and $1.3 trillion during the November-to-January period.

Digital Commerce 360 has estimated that holiday retail sales through all channels, including physical stores, are likely to rise 9.4% or $843.24 billion during the season. E-commerce revenues are expected to reach $215.45 billion, surpassing the $200 billion milestone for the first time. Additionally, KPMG expects that 2021 U.S. holiday sales will be 7% higher than last year. Mastercard SpendingPulse forecasts a 7.4% year-over-year rise in U.S. holiday sales.

Strong Industrial Production Data

Industrial production rebounded in October after a weather-indued decline in the previous month. The Fed reported that industrial production rose 1.6% in October after declining 1.3% in September. The consensus estimate was an increase of 0.8%.

Year over year, industrial production rose 5.1% in October, marking its highest monthly gain since December 2019. Capacity utilization for overall industrial production increased to 76.4% in October from 75.2% in September. The consensus estimate was 75.9%.

Within the three segments, manufacturing output — the largest component of industrial production — increased 1.2% in October. Noticeably, motor vehicle and parts production jumped 11% in October following a drop of 7.1% in September. Excluding motor vehicles, manufacturing output rose 0.6%.
The other two segments — utilities and mining — rose 1.2% and 4.1% in October, respectively.

Our Top Picks

We have narrowed our search to five momentum stocks within the retail and industrial production sectors. These stocks have strong growth potential for the rest of 2021 and have seen positive earnings estimate revisions in the last 30 days. Each of our picks carries a Zacks Rank #1 (Strong Buy) and has a Momentum Score of A or B.  You can see the complete list of today’s Zacks #1 Rank stocks here.

The chart below shows the price performance of our five picks in the past month.

Zacks Investment ResearchImage Source: Zacks Investment Research

Dillard's Inc. operates retail department stores in the southeast, southwest and Midwest areas of the United States. DDS gained from the continued momentum in consumer demand, which somewhat offset global supply-chain issues, including shipping delays and disruptions in the transportation network.

Strength in children's apparel as well as men's wear and accessories bode well for Dillard’s. Improved consumer demand and better inventory management by DDS led to lower markdowns, which boosted gross margin. Lower payroll expenses resulted in operating expense deleverage.

Dillard's has expected earnings growth of more than 100% for the current year (ending January 2022). The Zacks Consensus Estimate for current-year earnings has improved 57.1% over the last 7 days.

Boot Barn Holdings Inc. operates as a lifestyle retail chain devoted to western and work-related footwear, apparel and accessories. In addition, BOOT provides gifts and home merchandise.

Boot Barn Holdings’ products include boots, denim, western shirts, cowboy hats, belts and belt buckles, and western-style jewelry and accessories. BOOT also offers rugged footwear, outerwear, overalls, denim, and shirts, as well as safety-toe boots, and flame-resistant and high-visibility clothing. It sells its products through bootbarn.com.

BOOT has expected earnings growth of more than 100% for the current year (ending March 2022). The Zacks Consensus Estimate for current-year earnings has improved 23.6% over the last 30 days.

Builders FirstSource Inc. manufactures and supplies building materials, manufactured components, and construction services to professional homebuilders, sub-contractors, remodelers, and consumers in the United States. BLDR operates through four segments: Northeast, Southeast, South and West.

Builders FirstSource benefits from its focus on cost synergies, strategic acquisition, and robust demand arising from solid housing and repair & remodeling activities. BLDR continues to focus on investing in innovations and enhancing digital solutions for its customers.  

Builders FirstSource has expected earnings growth of more than 100% for the current year. The Zacks Consensus Estimate for current-year BLDR earnings has improved 31.1% over the last 30 days.

SPX FLOW Inc. is a supplier of engineered flow components, process equipment and turn-key systems, along with the related aftermarket parts and services. The operating segments of FLOW are Food and Beverage, Power and Energy and Industrial.

The Food and Beverage segment offers mixing, drying, evaporation and separation systems and components, heat exchangers and reciprocating and centrifugal pump technologies. The Power and Energy segment serves the oil and gas industry and nuclear and other conventional power industries. The Industrial segment serves chemical, air treatment, mining, pharmaceutical, marine, shipbuilding, infrastructure construction, automotive and water treatment industries.

SPX FLOW has expected earnings growth of more than 100% for the current year. The Zacks Consensus Estimate for current-year FLOW earnings has improved 8% over the last 7 days.

Penske Automotive Group Inc. is a diversified transportation services company that operates automotive and commercial truck dealerships. PAG operates under three reporting segments, Retail Automotive, Commercial Truck and Commercial Vehicles Australia/Power Systems.

Penske Automotive has become the largest dealership group for Freightliner in North America with the acquisition of Warner Truck Centers. The buyout of Kansas City Freightliner is set to fuel PAG’s prospects further. Recently, Penske acquired the remaining 51% of its Japanese-based joint venture of premium luxury automotive brands, which is likely to add $250 million in its consolidated annual revenues.

Notably, PAG has another $300 million in annualized revenues of deals in its pipeline that it expects to close either by 2021-end or early 2022. The Penske Transportation Solutions joint venture and the acquisition of Black Horse Carriers are also driving the firm's sales. The CarShop expansion offers ample growth visibility. The investor-friendly moves of Penske instill optimism.

PAG has expected earnings growth of more than 100% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 1.5% over the last 7 days.