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Solid Data Confirms U.S. Economic Stability: 5 Top Picks

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On May 17, two major data for April were released confirming that the fundamentals of the U.S. economy remain  solid. For the last couple of months, market participants have been highly concerned that the U.S. economy may enter recession in the near future due to mounting inflation and an ultra-hawkish monetary stance taken by the Fed to control price rise.

However, retail sales and industrial production data for April released yesterday confirmed that both consumer spending and business investment remained solid amid difficulties. At this stage, we have selected five stocks with a favorable Zacks Rank, either from retail or the industrial product sector, which should provide good returns going forward. These are —  Costco Wholesale Corp. (COST - Free Report) , Packaging Corporation of America (PKG - Free Report) , Target Corp. (TGT - Free Report) , The Kroger Co. (KR - Free Report) and IDEX Corp. (IEX - Free Report) .

Solid Retail Sales Data

The Department of Commerce reported that retail sales in April were up 0.9% month over month, marginally below the consensus estimate of 1%. The Fed hiked interest rate by 25 basis points in mid-March, for the first time in three years. However, the first retail sales data after rate hike did not result in any meaningful decline in consumer spending.

Consumer spending is the largest driver of the U.S. economy and the retail sales data is a major component of it. Year over year, retail sales grew 8.2% in April. The core retail sales (excluding auto) increased 0.6% in the month, beating the consensus estimate of 0.3%. Year over year, core retail sales grew 10.9%.

In addition to a good showing in April, the data for March was also revised upward to a gain of 1.4% from 0.5% reported earlier.  Core retail sales in March were also revised upward from 1.1% reported earlier to 2.1%.

Industrial Production Remains Strong

The Federal Reserve reported that industrial production increased by 1.1% in April, well above the consensus estimate of 0.5%. The March data was 0.9%. The manufacturing output, the most important component of industrial production, increased 0.8%. Utilities and mining advanced by 2.4% and 1.6%, respectively. Capacity utilization surged 79% in April.

On May 2, the Institute of Supply Management reported that the U.S. manufacturing index for April came in at 55.4% compared with 57.1% in March. Despite the decline last month due to skyrocketing inflation and labor shortage, the manufacturing index remained elevated in April, as any reading above 50% indicates expansion in manufacturing activities. Notably, April marked the 23rd consecutive month of manufacturing expansion.

Our Top Picks  

We have narrowed our search to five large-cap (market capital > $10 billion) stocks either from retail or industrial product sectors that have strong potential for 2022. These stocks have seen positive earnings estimate revisions in the last 30 days, which implies that these these companies may do good business going forward.

These companies are regular dividend payers that may act as an income stream in market’s downturn. Each of our picks carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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

 

Zacks Investment Research
Image Source: Zacks Investment Research

 

Costco’s key strengths are strategic investments, a customer-centric approach, merchandise initiatives, and an emphasis on membership growth. These factors have been helping COST register impressive sales and earnings numbers.

We expect Costco to register a 15.8% adjusted net income improvement in fiscal 2022 on 13.1% revenue growth. This outlook accounts for COST’s ability to navigate the ongoing inflationary environment and supply-chain bottlenecks on several fronts. A favorable product mix, steady store traffic, pricing power and strong liquidity position should help Costco keep outperforming.

Costco has an expected earnings growth rate of 18% for the current year (August 2022). The Zacks Consensus Estimate for current-year earnings improved 0.5% over the last 30 days. COST has a current dividend yield of 0.73%.

Packaging Corporation manufactures and sells containerboard and corrugated packaging products in the United States. PKG continues to benefit from robust packaging demand backed by e-commerce and increasing requirements for packaging of food, beverages and medicines.

PKG’s Packaging segment will benefit from higher corrugated products shipments with three additional shipping days. For the Paper segment, the company expects higher prices and mix. Packaging Corporation continues to implement price hikes that will help offset the impact of high operating costs, freight expenses and supply chain issues on margins.

Packaging Corporation has an expected earnings growth rate of 24.2% for the current year. The Zacks Consensus Estimate for current-year earnings improved 8.2% over the last 30 days. PKG has a current dividend yield of 2.57%.

Target has been deploying resources to enhance omni-channel capabilities, come up with new brands, refurbish stores and expand same-day delivery options to provide customers a seamless shopping experience. TGT has been making multiple changes to its business model to adapt and stay relevant in the ever-evolving retail landscape.

In fourth-quarter fiscal 2021 Target’s comparable sales grew for the 19th quarter in a row, gaining from strength in both store and digital channels. TGT envisions low-to-mid single-digit revenue growth, an operating margin rate of 8% or higher, and high single-digit increase in adjusted earnings per share for fiscal 2022.

Target has an expected earnings growth rate of 7.7% for the current fiscal year (ending January 2023). The Zacks Consensus Estimate for current-year earnings improved 0.4% over the last 30 days. TGT has a current dividend yield of 1.64%.

The Kroger has been undertaking efforts to strengthen its position not only with respect to products but also in terms of the way consumers shop. KR has been making investments to enhance product freshness and quality as well as expand digital capabilities. Further, The Kroger has been augmenting “Our Brands” portfolio by launching new products.

Management provided an upbeat outlook for fiscal 2022 projecting identical sales, without fuel, in the band of 2-3%. KR remains committed to doubling its digital business and profitability by the end of 2023.

The Kroger has an expected earnings growth rate of 4.1% for the current fiscal year (ending January 2023). The Zacks Consensus Estimate for current-year earnings improved 2.1% over the last 7 days. KR has a current dividend yield of 1.58%.

IDEX is poised to gain from a diversified business model, solid product portfolio, strength in its end markets and buyouts in the quarters ahead. IEX’s acquisition of KZvalve is expected to boost its position in the agricultural product market. For 2022, IDEX anticipates organic sales growth of 6-8% from the year-ago reported figure. Earnings are expected to be $7.50-$7.63, implying a rise from $6.30 in 2021.

IDEX has an expected earnings growth rate of 22.1% for the current year. The Zacks Consensus Estimate for current-year earnings improved 3.2% over the last 30 days. IEX has a current dividend yield of 1.29%.