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Earnings ESP

Barring a few hiccups, year 2017 has so far turned out to be a great one for investors. As the earnings season ramps up, the overall picture emerging for this reporting cycle is skewed toward the positive with a projected sequential increase in earnings and revenues. Hence, investors need to replenish their portfolio with stocks that are likely to trump estimates this season.

Among the 16 Zacks categorized sectors, we are focusing on Retail-Wholesale today.  The sector has gained 8.1% so far in the year and has comfortably outperformed the S&P 500 index that advanced 4.5%. We believe that the favorable economic indicators and friendlier fiscal and regulatory policies from the current regime bode well for the sector.

Factors Setting the Tone for the Sector

The recent rebound in oil prices, decelerating unemployment rate (4.5% in March) and a gradual improvement in the housing market signal that the economy is on a recovery mode. Undoubtedly, the retail sector presents itself as a lucrative investment hub amid such a backdrop. These factors are playing a crucial role in raising buyers’ confidence.

U.S. consumer confidence increased in March to touch the highest level since Dec 2000 amid growing labor market optimism. We expect this positive sentiment to translate into higher consumer spending. Definitely, soft retail sales for the second consecutive month in March raise some concern. As per the Commerce Department, U.S. retail and food services sales fell 0.2% in March, following a revised down reading of 0.3% decrease registered in February.

Certainly, the retail landscape has been undergoing a fundamental change. With a digital transformation in shopping and consumers splurging online, store and mall traffic has been hit hard. As a result, most retailers including big-box are struggling to compete with e-commerce channels and are being forced to trim their store count to focus more on an online model. Retailers who have responded quickly to it by staying ahead technologically stand in good stead.

The Season So Far

Per the Earnings Outlook report as of Apr 19, out of the 57 S&P 500 companies that have come up with their quarterly numbers, approximately 75.4% have posted positive earnings surprises, while 54.4% beat top-line expectations. According to the report, earnings for S&P 500 companies that have reported are up 18.7% from the same-period last year, while revenues have increased 6.4%.

About 16.7% of the S&P 500 companies in the Retail-Wholesale sector have reported their results, wherein 42.9% beat earnings estimates, while 57.1% surpassed revenue estimates. While earnings rose 1% year over year, revenues climbed 2%. According to the report, the sector is expected to record top-line growth of 3.3% but is likely to witness earnings decline of 5% this season.

Any Winners this Time?

Well the Retail-Wholesale sector has not been an outstanding performer and identifying the winners is definitely a herculean task. Given the numerous stocks in the sector that almost always muddle one’s stock-picking prowess, the Zacks methodology could offer some relief. Our research shows that for stocks with the combination of a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) and a positive Earnings ESP the chance of a positive earnings surprise is as high as 70%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

An earnings beat boosts investors’ confidence in the stock, which is reflected in its rapid price appreciation. These stocks could therefore turn out to be great additions to your portfolio ahead of their earnings releases.

Lowe's Companies, Inc. (LOW - Free Report) , which is slated to report its first-quarter fiscal 2017 results on May 24, is a solid bet with a long-term earnings growth rate of 14.6%. The Zacks Consensus Estimate for the quarter is pegged at $1.05. This home improvement retailer has a Zacks Rank #2 with an Earnings ESP of +2.86%. You can see the complete list of today’s Zacks #1 Rank stocks here.

We also suggest investing in McDonald's Corporation (MCD - Free Report) , which is slated to release its first-quarter 2017 results on April 25. This leading fast-food chain has a Zacks Rank #3 and an Earnings ESP of +3.03%. The Zacks Consensus Estimate for the quarter currently stands at $1.32. The company delivered an average positive earnings surprise of 5.7% over the trailing four quarters and has a long-term earnings growth rate of 8.9%.

Investors can even count on Williams-Sonoma, Inc. (WSM - Free Report) , with a Zacks Rank #3 and an Earnings ESP of +2.04%. The Zacks Consensus Estimate for the quarter is pegged at 49 cents. The company, which operates as a multi-channel specialty retailer of various products for home, delivered an average positive earnings surprise of 3% over the trailing four quarters and has a long-term earnings growth rate of 11.8%. The company is expected to report its first-quarter fiscal 2017 results on May 24.

Another stock that you may consider is Tiffany & Co. (TIF - Free Report) , with a Zacks Rank #3 and an Earnings ESP of +1.43%. The Zacks Consensus Estimate for the quarter is pegged at 70 cents. The company delivered an average positive earnings surprise of 7.9% over the trailing four quarters and has a long-term earnings growth rate of 10.8%. This designer, manufacturer and retailer of jewelry is expected to report first-quarter fiscal 2017 financial numbers on May 24.

Last but not the least is Wal-Mart Stores, Inc. (WMT - Free Report) , the operator of discount stores, supermarkets, supercenters, hypermarkets and warehouse clubs. The stock carries a Zacks Rank #3 with an Earnings ESP of +2.08%. The Zacks Consensus Estimate for the quarter is pegged at 96 cents. The company registered an average positive earnings surprise of 4.8% over the trailing four quarters and has a long-term earnings growth rate of 6.9%. The company is slated to report its first-quarter fiscal 2018 results on May 18.

These five stocks are not the only ones to bet on. With the help of the Zacks Stock Screener and some permutation and combination, you can find out other retail stocks that have the potential to beat the market.

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