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U.S. retailers saw the best two-month stretch of sales in at least two years in October, with Internet sales contributing significantly. Sales improved in 11 of 13 major categories including the biggest advance in five months at Internet retailers. The trajectory is so strong that online growth as well as online market share is expected to accelerate next year.

Solid wage growth, upbeat hiring and uptick in consumer confidence are giving Americans the wherewithal to spend online. This calls for investing in fundamentally solid online retail stocks poised to scale higher in the near term.

Retailers’ Bull Run in October

Sales at U.S. retailers rose 0.8% in October, with the prior month’s sales being revised up to 1%. This turned out to be the strongest back-to-back performance since Mar 2014, suggesting that the U.S. economy is off to a good start in the fourth quarter. The rise in retail sales was spearheaded by auto dealers that witnessed an 11-month high. Sales at gas stations, in the meantime, came in healthy, courtesy of a rise in prices at the pump.

The core retail sales that mostly exclude automobile and gasoline due to their volatility also went up solid 0.6%. From online retailers to home improvement stores as well as grocers, all posted a big leap in sales. Internet retailers, however, had a particularly strong month, success for whom came in at the cost of traditional retailers.

E-Commerce Beats Traditional Retailers

Sales at online retailers rose 1.5% in October, with the past 12-month average being 13%. However, the same cannot be said about brick-and-mortar stores that have been seeing declining sales in more than a decade, thanks to the shift in customers’ preference toward online shopping.

Sales at departmental stores slipped 0.7% last month and were down more than 7% in the past 12 months. Department stores attempted to boost their online presence, but, continued to lag behind their online counterparts. Prominent among department stores losing ground for years is none other than Macy's, Inc. (M - Free Report) . The company’s third-quarter net sales fell 4.2% year over year (read more: Macy's Misses Q3 Earnings Estimates, Retains EPS View).

Amazon.com, Inc. (AMZN - Free Report) , one of the major players in the online-based business, on the other hand, posted 29% year-over-year sales growth in its most recent quarter. The e-commerce giant raked in $500 billion in 2015 compared with $165 billion for department stores, according to the Commerce Department. Amazon accounted for an incredible 60% of U.S. online sales growth last year. With projects such as grocery services, enterprise retail, and drone delivery yet to be rolled out, more good times await the company.

Online sales have also been coming ahead of non-store sales for quiet sometime now. Non-store sales occur mainly on the web but also include categories including mail and phone orders, and door-to-door sales. The following diagram shows the year-over-year difference in margins between e-commerce and non-store sales in recent quarters:

Category

Q1 2015

Q2 2015

Q3 2015

Q4 2015

Q1 2016

Q2 2016

Nonstore

7.5%

6%

7.2%

7%

8.6%

12.7%

E-Commerce

14.6%

14.5%

15.2%

15.1%

15.2%

15.8%

Online Sales to Accelerate

The growth trajectory for online sales, in fact, is so strong that it is expected to touch $440 billion next year, a jump from $395 billion anticipated this year, according to “U.S. Online Sales Forecast: Omni-Channel Retailing Challenged by Its Success,” a report from FTI Consulting. 

The FTI report also stated that almost 90% of shoppers made online purchases in the past three months, with more consumers expected to migrate to the online channel over the next decade. Consumers’ shopping patterns have evolved, with them not just splurging on ‘event days’ such as Cyber Monday but also on other weekend days.

What’s Behind the Surge?

Healthy wage growth and steady hiring are giving Americans the means to spend online. The U.S Department of Labor said that the average hourly earnings increased by 10 cents or 0.4% to $25.92 in October, which was preceded by an increase of 8 cents witnessed in September. Wage growth increased 2.8% year on year, the highest since Jul 2009. The unemployment rate, however, declined 0.1 percentage point last month to 4.9% (read more: 4 Stocks to Buy on Strongest Wage Growth Since Recession).

Consumer confidence also rose to a five-month high in early November. The University of Michigan said that its preliminary index of sentiment for the month climbed to 91.6 from 87.2 in October. 

4 Top Internet Stocks to Buy Now

In view of the aforementioned factors, e-commerce accelerated in October, highlighting the run up to the key holiday season. Online retail sales are also projected to gather steam next year. Given such bullish trends, investing in solid online retailers will prove judicious. We have selected four such stocks that flaunt a Zacks Rank #1 (Strong Buy) or 2 (Buy).

Stamps.com Inc. (STMP - Free Report) provides Internet-based postage services in the U.S. The company has a Zacks Rank #1. Stamps.com reported third-quarter earnings per share of $2.33 that surpassed the Zacks Consensus Estimate of $1.61 (read more: Stamps.com tops Street 3Q forecasts).

The company’s expected growth rate for the current quarter and this year are a mammoth 69.91% and 93.1%, respectively. In the last six months, the company has given a return of 30.8%. 

Groupon, Inc. (GRPN - Free Report) operates online local commerce marketplaces that connect merchants to consumers by offering goods and services at a discount in North America. The company has a Zacks Rank #2.

Groupon’s expected growth rate for the next quarter and year are 23.33% and 44%, respectively. In the last six months, the company gave a return of 18.2%. 

EVINE Live Inc. (EVLV - Free Report) – a Zacks Rank #2 stock – operates as a digital commerce company in the U.S.

The company’s expected growth rate for the current quarter and year are 57.78% and 41.7%, respectively. In the last six months, the company returned a staggering 88.1%. You can see the complete list of today’s Zacks #1 Rank stocks here.

Mercadolibre, Inc. (MELI - Free Report) hosts online commerce platforms in Latin America, but, has a real estate classified platform that covers various areas in Florida. The stock sports a Zacks Rank #1.

Mercadolibre reported third-quarter earnings of 89 cents per share that beat the Zacks Consensus Estimate of 83 cents (read more: MercadoLibre beats 3Q profit forecasts).

The company’s expected growth rate for the next quarter and year are 16.18% and 38.9%, respectively. In the last six months, the company returned 22.1%.

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