After declining slightly last month, consumer confidence rebounded strongly this month to hit a nine-year high. This indicates that the Presidential election had not dampened consumer spending. This was also supported by a significant upward revision by the Commerce Department in consumer spending during the third quarter, which played a major role in boosting the economy during the quarter and helped it to expand at a better-than-expected rate.
In this scenario, picking stocks from the retail domain, which is expected to draw the major part of consumer spending, might be a good investment option.
9-Yr High Consumer Confidence
According to The Conference Board, Consumer Confidence Index increased from October to 107.1 this month, hitting its highest level since Jul 2007. Moreover, the reading for last month was revised upward from 98.6 to 100.8. The Present Situation Index and Expectations Index also rose 7.2 and 5.7 points from last month to 130.3 and 91.7 in November, respectively.
Director of Economic Indicators at The Conference Board said: “Consumer confidence improved in November after a moderate decline in October, and is once again at pre-recession levels... A more favorable assessment of current conditions coupled with a more optimistic short-term outlook helped boost confidence.”
Additionally, the sentiment of surveyed consumers about the economic scenario was also positive. While 29.2% of the correspondents, compared to last month’s 26.5%, said that business conditions are “good,” the percentage of those feeling “bad” declined from October’s 17.3% to 14.8% in November. The share of respondents, who believe that jobs are “plentiful,” also improved to 26.9% from last month’s 25.3%. Though a major part of the survey was done before the election, results from the samples taken in the post-election period showed that “consumers’ optimism was not impacted by the outcome.”
Consumer Spending Estimate Revised Upward
According to the Commerce Department’s “second estimate,” the U.S. economy expanded at a pace of 3.2% during the third quarter, witnessing the highest rate of growth since 2014’s third quarter. It also came significantly higher than the consensus estimate, “advance estimate,” and second quarter growth rate of 3%, 2% and 1.4%, respectively. Along with encouraging corporate profits during the quarter and solid rise in nonresidential investment, the upward revision in consumer spending during the period also played a key role behind the better-than-expected third quarter GDP growth.
The “second estimate” showed that consumer spending during the quarter rose at a pace of 2.8%, better than the earlier estimate of 2.1% rise. Moreover, it remained the highest contributor in economic expansion during the quarter. According to the report, personal consumption expenditures made a contribution of 1.89 points on third quarter GDP. Separately, personal consumption expenditure rose at the best pace over the past three-months, increasing 0.5% in September in contrast to a decrease of 0.1% in August.
4 Retail Stocks to Buy
In addition to this encouraging economic data, robust Thanksgiving weekend sales are further expected to boost retail sectors during the ongoing quarter. Moreover, retail companies have also posted encouraging third quarter performance. As of Nov 18, 36 retailers in the S&P 500 index (out of the 43 total) posted third-quarter results. Total earnings for these retailers were up 7.4% from the same period last year on 4.9% higher revenues.
Given this backdrop, fundamentally strong retail stocks might prove to be good additions to one’s portfolio. However, picking winning stocks may prove to be difficult.
This is where our VGM score comes in. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners. However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM score.
We have narrowed down our search to the following stocks based on a good Zacks Rank and a VGM score of ‘A.’
Best Buy Co., Inc. (BBY - Free Report) : This technology products retailer has a Zacks Rank #1 (Strong Buy) and has an expected earnings growth rate of 17.8% for the current year compared with the industry average of 0.1%. Its earnings estimate for the current year has increased 7.7% over the last 30 days.
Burlington Stores, Inc. (BURL - Free Report) : This branded apparel products retailer has a Zacks Rank #1 and has an expected earnings growth rate of 37.6% for the current year compared with the industry average of 11%. Its earnings estimate for the current year has jumped 6.4% over the last 30 days. You can see the complete list of today’s Zacks #1 Rank stocks here.
Target Corporation (TGT - Free Report) : This general merchandise retailer has an expected earnings growth rate of 11.2% for the current year compared with the industry average of 11%. The forward price-to-earnings (P/E) ratio for the current financial year (F1) is 14.91, lower than the industry average of 23.29. Its earnings estimate for the current year has improved 5.2% over the last 30 days. it carries a has a Zacks Rank #2 (Buy).
Potbelly Corporation (PBPB - Free Report) : This sandwich shops operator has a Zacks Rank #2 and has an expected earnings growth rate of 29.3% for the current year compared with the industry average of 10.6%. Its earnings estimate for the current year has increased 2% over the last 30 days.
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